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Regulators Will Happily Keep Bank Shares Down: KBW

NEW YORK (TheStreet) -- Large banks subject to enhanced capital requirements and the new Consumer Financial Protection Bureau are likely to see their stocks continue to underperform.

The announcement last Thursday by federal bank regulators clarifying which institutions would be subject to monitoring by the new Consumer Financial Protection Bureau, or CFPB, is just "is one more example of the regulatory overhang facing the largest banks," according to KBW analyst Frederick Cannon.

The CFPB is a new independent federal agency -- formed under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was co-sponsored by former Senator Chris Dodd and Rep. Barney Frank (D-Mass.), and signed into law by President Obama in July of last year -- that has "exclusive authority to examine for compliance with federal consumer financial laws and primary authority to enforce those laws," for banks with total assets exceeding $10 billion.

Representative Barney Frank (D-Mass.)

Cannon estimates that "95 banks or thrifts could be subject to more direct CFPB supervision, which could include audits and heightened regulatory compliance," which follows the Basel Committee's recent designation of criteria to identify Globally Systemically Important Financial Institutions, or G-SIFIs.

According to the Financial Stability Board, G-SIFIs include the "big four" U.S. banks of Bank of America (BAC), Citigroup (C), JPMorgan (JPM), and Wells Fargo (WFC), as well as Goldman Sachs (GS), Morgan Stanley (MS), Bank of New York Mellon (BK), and State Street (STT).

According to Cannon, the "non-systemic banks in [KBW's] coverage universe have outperformed G-SIFI banks by 24% points, with much of the outperformance coming in the second half of 2011."

A quick glance at share price multiples for the "big four" U.S. banks emphasizes investors' dismay over the almost-daily onslaught of regulatory requirements faced by the largest industry players:

  • Shares of Bank of America closed at $5.78 on Friday and traded for just 5.8 times the consensus 2012 earnings estimate of $99 cents a share, among analysts polled by FactSet. The shares were also trading for less than half of their Sept 30 tangible book value of $13.20, according to SNL. The shares were down 57% year-to-date.
  • Citigroup was trading for just 6.0 times the consensus 2012 EPS estimate of $4.39 and just over half of tangible book value, based on Friday's closing price of $26.28. The shares were down 44% year-to-date.
  • JPMorgan traded for 6.3 times the consensus 2012 EPS estimate of $4.89 and just over tangible book value, as of Friday, when the shares closed at $30.62. JPMorgan's shares were down 26% year-to-date.
  • The only member of the "big four" group of U.S. banks trading over book value at Friday's market close was Wells Fargo, which closed at $24.69, or 1.4 times tangible book, according to SNL. The shares traded for 7.7 times the consensus 2012 EPS estimate of $3.20. Wells Fargo was the best of the big four, with shares down "only" 19% year-to-date.

Canon believes that "the benefits of lower capital requirements, less fee income pressure, less onerous terms for capital deployment, and less European exposure in general could lend support to non-systemic banks," with outperformance continuing during 2012.

KBW's favorite bank picks among companies with total assets of less than $10 billion that aren't facing the increased regulatory burdens include:

  • F.N.B. Corp (FNB) of Hermitage, Pa., which closed at $10.77 Friday, returning 14% year-to-date. The company had $9.95 billion in total assets as of Sept. 30. KBW analyst Damon Delmonte rates the shares "Outperform," with a price target of $12.50. The shares trade for 13 times the consensus 2012 EPS estimate of 83 cents, among analysts polled by FactSet, and 2.2 times tangible book value, according to SNL Financial.
  • Citizens Republic Bancorp (CRBC) of Flint, Mich., closed at $10.13 Friday, returning 65% year-to-date. The company had $9.6 billion in total assets as of Sept. 30. The shares have recovered this year as credit quality has improved. While Citizens Republic owes $300 million in federal bailout funds received through the Troubled Assets Relief Program, or TARP, several analysts see the company moving closer to recapturing over $300 million in deferred tax assets. KBW analyst John Barber rates the shares "Outperform," with a price target of $13.00. The shares trade for 8.2 times the consensus 2012 EPS estimate of $1.24, and just over tangible book value.
  • Capitol Federal Savings (CFFN) of Topeka, Kan., had $9.5 billion in total assets as of Sept. 30. The shares closed at $10.99 Friday, and were up slightly year-to-date. Damon Delmonte rates the shares "Outperform" with a $14.00 price target. The shares trade just below book value, according to KBW, and for 27 times KBW's 2012 EPS estimate of 41 cents.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

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