NEW YORK ( TheStreet) -- Once again, analyst ratings changes reflect the unfolding theme that bank stock investors need to move beyond distressed-market bargain shopping and focus on names with strong earnings growth potential.
As discussed in our recent look at cheaply priced to 2013 earnings estimates and Guggenheim's bank picks, the "bargain shopping" approach of looking for names trading for low multiples to tangible book values isn't going to cut it for long-term investors, especially when you consider how significant this year's bank stock rally has been.
The KBW Bank Index (I:BKX) was up 27% year-to-date through Wednesday's close at 49.90, with many of the most familiar names seeing a significant pop following the completion of the Federal Reserve's annual bank stress tests last Tuesday.
Morgan Stanley analyst Ken Zerbe said on Thursday that "it is too early to aggressively build positions in the banks," despite the implied boost to net interest margins from the recent rise in the yield on 10-year U.S Treasury securities, and that the "stress test results provide little direct benefit to the mid-cap banks given most were more than sufficiently capitalized already, with a median Tier 1 common ratio of 12.1%."As we have emerged from the credit crisis, one ways for investors to make comparisons among bank and thrift holding companies facing lingering, but declining, credit costs that skew earnings, has been to focus on price multiples to tangible book value. With the sector now having moved so far ahead in such a short time, this broad approach will no longer work for long-term investors. Two of the best-known U.S banking names still trade at discounts to tangible book value, but for long-term investors who can look beyond a one-year time-frame, the forward price-to-earnings multiples are very attractive, especially for investors who believe in this economic recovery:
- Shares of Bank of America (BAC - Get Report) closed at $9.82 Wednesday, returning 77% year-to-date, following a 58% drop during 2012. To put those return numbers in perspective, the shares have had a negative return of 28% for the past 52 weeks. Investors have taken comfort that the company's passing stress test grade from the Federal Reserve takes a common equity raise off the table. The shares trade for 0.8 times tangible book value, according to HighlineFI, and while they may appear expensive, at 14 times the consensus 2012 earnings estimate of 69 cents a share, among analysts polled by Thomson Reuters, they look positively cheap, at eight times the consensus 2013 EPS estimate of $1.19.
- Citigroup (C - Get Report) closed at $37.80 Wednesday, returning 44% year-to-date, following last year's 44% drop. The 52-week return is a negative 14%. Like Bank of America, the shares trade for 0.8 times tangible book value. Citi trades for 9.5 times the consensus 2012 EPS estimate of $3.97, and for just under eight times the consensus 2013 EPS estimate of $4.78.