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NEW YORK (
UBS on Friday initiated research coverage of nine large-cap U.S. banks, with buy ratings on four of them.
UBS analyst Brennan Hawken said that "near-term downside risk is elevated" for the largest U.S. bank holding companies, with stock prices at significant discounts to book value reflecting "some of the difficulties in the current environment." UBS recommended "investors look for buying opportunities in well-capitalized firms trading at distressed levels when risk aversion tends to run high."
Among the "big four" U.S. bank holding companies, three traded at discounts to book value as of Thursday's market close, according to SNL Financial:
Shares of Bank of America (BAC - Get Report) closed at $5.45 on Thursday, and traded for just 0.4 times their Sept. 30 tangible book value of $13.20, according to SNL Financial, and just 5.5 times the consensus 2012 earnings estimate of 99 cents a share, according to analysts polled by FactSet. The shares are down 60% year-to-date.
Citigroup (C - Get Report) closed at $25.92 on Thursday, for a year-to-date decline of 45%. The shares traded for just over half their tangible book value, and for 6.0 times the consensus 2012 EPS estimate of $4.35.
JPMorgan Chase (JPM - Get Report) closed at $31.76 Thursday, trading just below tangible book value and for 6.5 times the consensus 2012 EPS estimate of $4.88. The shares are down 24% year to date.
Large-cap Regional Banks
UBS initiated coverage for six large, regional U.S. banks, with neutral ratings for
Wells Fargo (WFC - Get Report),
PNC Financial Services Group (PNC), and
Regions Financial (RF), and buy ratings for the following:
UBS analyst Greg Ketron said that U.S. Bancorp (USB - Get Report) was his firm's "top pick" among the large-cap regionals, having "the most optimal banking model for the current environment," along with "a proven track record of superior revenue generation." Ketron said he expects that the bank's "fee revenues will continue to drive return outperformance versus peer banks," and notes that U.S. Bancorp achieved an average return on common equity of "15.7% over the first 3 quarters of 2011 vs. an average of 7.5% at peers." UBS's 12-month price target for U.S. Bancorp is $32, and Ketron estimated the company will earn $2.65 a share in 2012. The shares closed at $25.80 Thursday, and are down 3% year to date.
Ketron's also rated BBT (BBT - Get Report) a buy, with a $28 price target, calling the Winston-Salem, N.C., lender "conservative underwriter which benefited the company through the downturn." BB&T has taken advantage of the banking crisis to expand its southern footprint on the cheap, with its purchase of the failed Colonial Bank of Montgomery, Ala., from the Federal Deposit Insurance Corp. in 2009, and its recent deal to acquire BankAtlantic the main subsidiary of BankAtlantic Bancorp.(BBX). Ketron added that "BBT has maintained a larger degree of its profitability as it avoided or minimized the higher risk business segments pre-cycle." BB&T closed at $23.66 Thursday, for a year-to-date decline of 8%. Ketron estimated the company will earn $2.35 a share in 2012.
In support of an initial buy rating for SunTrust (STI - Get Report), with a price target of $22, Ketron said that the Atlanta lender's "upside potential significantly outweighs the downside risk." Ketron added that SunTrust was "at a deep discount though it has strong capital levels, lower dilution risk, and significant earnings leverage to improving credit." SunTrust closed at $16.67 Thursday, down 43% year to date. The analyst estimated that the bank will post 2012 EPS of $1.90.
Ketron said Wells Fargo had a "a leading franchise presence across the country and a strong capital base," which "historically generated above peer performance across a number of key valuation metrics," but supported a neutral rating for the shares, citing the enhanced Basel III capital requirements that Wells Fargo will face as a systemically important financial institution, and "the uncertainty around mortgage issues and repurchase request volatility." Shares of Wells Fargo closed at $25.61 Thursday, declining 16% year to date. Ketron set a $27 price target and estimated the company would earn $3.10 a share in 2012.
UBS initiated coverage of the three largest domestic trust banks, with neutral ratings for
Bank of New York Mellon (BK) and
Northern Trust (NTRS), and a buy rating for
State Street (STT).
Ketron said that "all three trust banks are fundamentally strong companies that face headwinds going into 2012," but that "over the longer term, they appear well-positioned for recovering markets, with State Street the "best positioned among the group to weather the environment, given its balance sheet flexibility to withstand lower rates, higher capital levels/deployment, and current strategy to greatly improve its operating margin/leverage."