June's Five Top-Performing Big Bank Stocks

NEW YORK (TheStreet) -- While nearly all large bank stocks have been in the doldrums of late, there were a couple of bright spots in June. Here are the five best stock performers for the month from among the 50 largest (by total assets) public U.S. bank holding companies.

Shares of Capital One Financial (COF) of McLean, Va. closed at $40.30 Wednesday, down 2% in June but returning 7% year-to-date. It finished last week at $39.43.

Earnings: Capital One had a good first quarter, reporting net income of $636 million or $1.40 a share, improving from earnings of 83 cents a share in the fourth quarter and a net loss of 44 cents a share in the first quarter of 2009. The ROA [return on assets] for the first quarter was a respectable 1.39% and the ROE [return on equity] was 12.15%, with the improvement in earnings driven by a release of $566 million in reserves, as the company's loan quality improved.

Capital: Capital One paid off its tab with the Troubled Assets Relief Program, or TARP, in June 2009. The company's Tier 1 leverage ratio was 6.04% and its total risk-based capital ratio was 16.90% as of March 31, exceeding the 5% and 10% ratios most banks need to maintain to be considered well capitalized.

Tier 1 capital dropped considerably during the first quarter as the company moved off-balance-sheet conduits onto its balance sheet as required by new accounting rules, which increased total assets by 18% to $201 billion as of March 31. The company was included in TheStreet's 5 Banks That Might Get Burned By Reform, since shareholders face the possibility of a dilutive common offering or conversion, assuming the financial reform bill is passed by Congress, as its ratio of qualifying trust-preferred equity to Tier 1 capital was 31.6% as of March 31.

Asset Quality: Looking at overall credit quality, nonperforming assets - including nonaccrual loans and securities and loans past due 90 days or more (less government-guaranteed balances) plus repossessed real estate -- comprised 2.43% of total assets as of March 31. This compared to the national aggregate ratio of "noncurrent assets plus repossessed real estate" of 3.43% reported by the Federal Deposit Insurance Corp. Capital One's net charge-off ratio for the first quarter was 8.21%, reflecting the company's primary focus on credit card lending.

Like other major card lenders, Capital One reports credit card loss and delinquency rates monthly. According to SNL, Capital One's annualized net loss rate on credit cards for May was 8.89%, which was down from a peak of 9.77% in January, but up slightly from 8.84% in May 2009. Bank of America (BAC) had the highest credit card loss rate among the "big six" credit card lenders in May, at 13.33%, followed by Citigroup (C) at 11.16%. American Express (AXP) had the lowest card loss rate among the group for May, at 6.10% and also showed the best year-over-year improvement by far, with the loss rate down significantly from 10.42% a year earlier.

Capital One's 30+ days delinquency rate for cards was 5.29% in May, improving from a peak of 6.56% in November and 5.41% in May 2009. All of the big six card lenders showed year-over-year improvements in delinquency rates except for Citigroup, which reported a May delinquency rate of 5.59%, a shade higher than 5.58% a year earlier.

Prospects: Capital One's credit quality is on the rebound and earnings are bound to improve in line with the overall economy and additional releases of loan loss reserves. Investors need to be wary, however, of the financial reform legislation, since we don't know how the Collins Amendment's trust-preferred equity restrictions will be phased in. The faster they are phased-in, the more likely it is that common shareholders will have their stakes diluted.