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10 Bank Stocks Trading Below Book With Up To 85% Upside (Update 2)

Updated with additional comment on Citigroup and with market close information and total return information.

NEW YORK ( TheStreet) -- TheStreet has identified a select list of bank stocks still trading below tangible book value, despite the sector's strong year-to-date rally.

Despite the banking sector's strong year-to-date returns, scores of bank stocks still trade below tangible book value, and analysts see a hefty payday down the line for patient investors.

When considering the young year's amazing bank stock rally, it pays to consider an investor's timing. Yes, shares of Bank of America (BAC - Get Report) were up 44% year-to-date through Friday's close at $8.02, but the one-year total return is negative 45%.

Using data provided by HighlineFI, we narrowed down the list of banks trading below tangible book value by only including actively traded names, with average daily trading volume of over 50,000 shares, and names for which the Dec. 30 tangible book value was available. Then we isolated the 10 with the highest implied one-year upside potential, based on mean price targets among analysts polled by Thomson Reuters.

The list includes all four four Puerto Rico bank holding companies, with the low valuations reflecting the island territory's severe and prolonged recession, while the analysts' (mostly) positive views reflect increasing market share for two of the names, healthier forward profit estimates for the group, and the long-term recapture of deferred tax assets to earnings and capital.

B. Riley analyst Joe Gladue says that "Puerto Rico has been in a recession for at least five years now," but it now "looks like the local economy is not shrinking anymore." The analyst also says that despite the consolidation of banks headquartered on the island territory -- from seven to four over the past two years -- "there is still considerable speculation that there can be additional consolidation in the market, and quite a few people think that would be beneficial for the remaining banks and the economy."

A logical combination, according to Gladue, would be First Bancorp (FBP) and Doral Financial (DRL), since First Bancorp has completed a recapitalization, but "one thing they don't have is a big mortgage origination platform, which Doral has."

"Doral has said they would be interested in the consolidation as either a buyer or a seller," according to Gladue, who also says that a combined First Bancorp and Doral "could probably see $100 million in cost savings from a combination, which would improve the earnings of the combined company significantly."

Two of the group of 10 active names trading under book with the most upside potential are members of the "big four" group of U.S. banks.

Then again, the two big four members trading above book, appear cheaply priced to forward earnings estimates.

Shares of JPMorgan Chase (JPM - Get Report) trade for 1.2 times tangible book value, according to HighlineFI, but for an attractive 8.2 times the consensus 2012 earnings estimate of $4.67, among analysts polled by Thomson Reuters.

That's the lowest forward price-to-earnings ratio among the big four. JPMorgan Chase's shares were up 15% year-to-date through Wednesday's close at $38.46. Analyst sentiment is very strong, with 29 out of 32 analysts rating the shares a buy, while the remaining three analysts are on the fence.

Shares of Wells Fargo (WFC - Get Report) closed at $30.59 wednesday, rising 13% year-to-date, and trading for 1.8 times tangible book value. Wells Fargo was also the most expensive of the big four to forward earnings, with the shares trading for 9.7 times the consensus 2012 EPS estimate of $3.20.

Then again, you get what you pay for. Wells Fargo has been the gold standard among the big four recently, with a return on average assets (ROA) ranging from 1.11% to 1.27% over the past five quarters. None of the other big four club members even come close.

With so many banks still trading below tangible book value, it's clear that there are still plenty of bargains out there for investors, but as we saw in 2011, the killing may not always be quick. You may have to go in for a few years, and patiently wait-out the headline risk -- especially for the largest banks facing mortgage putback demands -- as the economy continues to improve.

Here are the TheStreet's 10 banks trading below book value, with the most upside potential:
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BPOP $29.84 0.40%
BAC $14.77 1.44%
C $46.67 0.84%
JPM $63.79 0.93%
WFC $50.58 1.20%


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