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Updated with comments from Credit Suisse, estimating that Bank of America won't achieve full compliance with Basel III capital requirements until late in 2014.
NEW YORK (
TheStreet) -- The first quarter was a remarkable ride for the stock market and for banks in particular. But the big question is whether the banking sector can keep up the torrid pace.
S&P 500 Index (SPX.X) rose 12% during the first quarter, while the
Nasdaq Composite (^IXIC) fared even better, rising 19%. The
KBW Bank Index (I:BKX) blew past both, with a whopping 26% year-to-date return, through Friday's close at 49.74. Then again, while both of the broad indexes had good returns for the 52-week period ended Friday, the KBW Bank Index was down 4% for the period.
The rally reflected a lousy performance during 2011 when investors -- and some of the banks -- couldn't get a handle on just how much losses the banks would take from mortgage putback demands and the long-negotiated mortgage foreclosure settlement.
Investors also worried about various threats to banks' revenue, with the Durbin Amendment's caps on interchanges fees charges to merchants to process debit card transactions being implemented by the
Federal Reserve on October 1.
Federal Reserve then saw its actions acting as a major catalyst for bank stocks, when the regulator announced the results of its 2012 bank holding company stress tests on March 13.
JPMorgan Chase (JPM - Get Report) forced the Fed to move its announcement up by two days, when the company announced before the market closed on March 13 that the Fed hadn't objected to the company's plan to raise its dividend and authorize a major share repurchase plan.
The 19 holding companies subject to the Fed's Comprehensive Capital Analysis and Review (CCAR) for 2012 were stress-tested under a severe economic scenario In order to pass the stress tests, the results had to show that the group of 19's estimated Tier 1 common equity ratios would remain over 5% under the adverse economic scenario.
To have their capital plans approved, the companies' estimated Tier 1 capital ratios at the end of 2013 would have to be above 5%, "with all proposed capital actions through Q4 2013."
While some of the holding companies -- including
Citigroup (C - Get Report),
SunTrust (STI - Get Report) and
Fifth Third Bancorp (FITB) -- had some or part of their plans to return capital to investors rejected by the Fed., most of the group of 19 announced dividend increases and share buybacks.
Bank of America (BAC - Get Report) was also a big winner from the stress tests, which included an analysis of mortgage putback risk under the adverse economic scenario. While the company didn't submit any plans to the Federal Reserve for dividend increases or share buybacks, the test results served to soothe investor fears that the Bank of America might need to further dilute its common shares through a major public offering.
Several of the best-performing large-bank stocks during the first quarter were trading significantly below tangible book value at the end of last year, underlining recovery bargains for investors. KBW analyst Fred Cannon said on March 25 that the banks' value rally might be sustainable if it were "taken over by firms with positive earnings estimate revisions."
Looking ahead, investors may need to look beyond book value and take a longer-term approach, focusing on banks trading at low multiples to consensus earnings estimates.
FIG Partners analyst John Rodis said on March 20 that investors should look at price multiples to 2013 earnings estimates, "because things are certainly better this year, and by 2013 you're going to have a good read on things."
Rodis added that "the group has momentum, but on a valuation basis, for the better quality names, it is hard to justify much higher levels," adding that "it also seems that there's new money coming into the group, from institutions that were sitting on the sidelines," so that "prices tend to overshoot," both on the downside, and now on the upside.
Among the largest U.S. bank holding companies, here are the five bring home the strongest returns for investors during the fourth quarter, along with forward P/E multiples and first-quarter earnings previews: