Both banks trade lower in the pre-market hours over the downgrade

Published By: Myrna Salomon on January 11, 2017 08:56 am EST

Big banks saw significant gains in their respective market values since the election day in November and FOMC meeting in December. After their worst start to the year in 2016, since the financial crisis in 2008, the banking sector saw the most remarkable recovery at the end of the year.

As stocks are becoming more sensitive toward the news, some analysts believe that the sharper rally has caused these stocks to become fully valued, and overvalued in some cases. For instance, Bank of America (NYSE:BAC) and Citigroup Inc (NYSE:C) have gained 33% and 20% since the election day. Hockey-stick curves tend to be dangerous as traders can sense what’s coming next. Maybe for the similar reasons, UBS analyst, Saul Martinez downgraded both the banks and lowered their target prices.

Bank of America was downgraded from a Buy to a Neutral with the target price being lowered from $24 to $23. The stock closed at $22.94 on Tuesday. The analyst believes that the stocks have reached their full valuation since the mid of 2016. Since Brexit in June, Bank of America stock has increased almost 75%. The interest rates have also been low, therefore, such a rally points towards being overbought.

Mr. Martinez double downgraded Citigroup from a Buy to a Sell with the target price being lowered from $64 to $58. Recently, Barclays analyst estimated that Citigroup will benefit less from the lower tax rates under Trump administration. Moreover, the stock is more exposed towards President-elect Donald Trump’s protectionist policy.

Several analysts have been slight pessimistic over the financial sector after a steep rally. UBS analysts also downgraded KeyCorp (KEY), Fifth Third (FITB), and Zions Bancorp (ZION), on the same day.

Bank of America and Citigroup have recently been downgraded by analysts. However, the majority of them still recommend a Buy. Higher interest rates and favourable polices under Trump administration remain tailwinds for a majority of the banks.