NEW YORK ( TheStreet) -- While the best-performing bank stocks year-to-date began the year trading at very significant discounts to book value, this type of rally can't last and investors had better turn their sites on the banks most likely to continue growing their businesses.
Loan growth can spell earnings growth. More importantly, significant loan growth at a moment when the yield curve is steepening can lead analysts to increase their earnings estimates, which propels shares forward in a less-stressed market.
While the Federal Reserve has indicated repeatedly that it plans to keep its target federal funds rate close to zero through 2014, long-term rates have moved up recently, with 10-year treasury yields at 2.22% Tuesday morning, after trading as low as 1.95% on March 5.
One veteran Wall Street bond portfolio manager says "the sentiment is that the economy is showing signs of strengthening and there's a feeling that the Fed may not have to go out two years with the low rates."For two of the best-performing bank stocks year-to-date, the rally has been based on very low multiples to book: Shares of Bank of America (BAC - Get Report) closed at $9.60 Tuesday, returning 73% year-to-date, following a 58% plunge during 2011. The shares are still heavily discounted, trading for just 0.7 times the company's reported Dec. 30 tangible book value of $12.95. Factoring-in the company's mortgage putback exposure, the consensus among analysts polled by Thomson Reuters is for Bank of America to report first-quarter earnings of just 11 cents a share. The full 2012 consensus EPS estimate is 68 cents. Going out another year, the shares appear attractively priced, at just eight times the consensus 2013 EPS estimate of $1.07. Shares of Citigroup (C - Get Report) closed at $36.78 Tuesday, returning 40% year-to-date, following last year's 44% decline. The shares trade for 0.7 times the company's reported Dec. 30 tangible book value of $49.81. Analysts estimate Citigroup will post first-quarter EPS of 99 cents, with a full-year 2012 EPS estimate of $4.07. Citi's shares are also attractive priced for investors looking ahead, at eight times the consensus 2013 EPS estimate of $4.69. KBW analyst Fred Cannon said on Monday that "a book value based rally is unlikely to be sustained for firms where earnings come in at or below expectations," and also pointed out that "financial stocks have nearly regained all of the declines from last year." Cannon also said that "a further steepening of the yield curve, which would improve the earnings for most financials, or significant first quarter earnings beats, will be required to sustain the rally from current levels." When looking at first-quarter earnings, keep in mind that year-over-year comparisons will be skewed for the first three quarters of 2012, since the Federal Reserve on October 1 implemented the caps on interchange fees charged to merchants to process debit card purchases, as required by the Durbin Amendment to the Dodd-Frank financial reform legislation. Banks are also expected to see a declining boost to earnings from the release of loan loss reserves. For our first-quarter earnings preview for large regional bank holding companies, we're focusing on five that showed strong loan growth during the fourth quarter. Here they are, by descending price-to-forward-earnings ratio: