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"At 12x 2013 earnings" estimates, Usdin said that current price "valuation seems pretty fair" for most of the banks covered by Jefferies, and said "the group will likely need even-better loan growth" than analysts expect, "to power through from here."
Of course, some of the best-known banking names outside of Usdin's coverage universe are trading at much lower multiples to forward earnings:
Shares of Bank of America (BAC - Get Report) closed at $9.57 Friday, returning 72% year-to-date, following a 58% plunge during 2011. The shares trade for just eight times the consensus 2013 EPS estimate of $1.20, among analysts polled by Thomson Reuters. Bank of America is also trading at a heavily discounted 0.8 times tangible book value, according to HighlineFI.
Citigroup (C - Get Report) closed at $36.55 Friday, returning 39% year-to-date, following last year's 44% drop. Citi trades trades for eight times the consensus 2013 EPS estimate of $4.78. The shares are also discounted to 0.7 times tangible book value.
JPMorgan Chase closed at $45.98 Friday, returning 39% year-to-date, following a 20% decline during 2011. While JPMorgan is generally considered a safer play than BAC or Citi, with the shares trading for 1.5 times tangible book value, the shares still appear cheap to forward earnings, trading for eight times the consensus 2013 EPS estimate of $5.52.
Usdin favors his top picks for various reasons, including tailwinds from strong loan growth, credit improvement, an expanding net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and wholesale borrowings -- for one name, while most of the industry continues to face narrowing margins as deposits continue to pour in, while interest rates remain low.
Despite a recent spike in long-term interest rates, Jefferies expects net interest margins to "continue to grind lower given lower reinvestment yields and tight spreads on new loan production," with 75% of the firm's covered banks expected to see sequential margin declines.
Usdin expects stable first-quarter fee revenue for lenders, "as seasonal weakness in payments should be mitigated by better mortgage banking and markets-related revenue," adding that "Mortgage banking could be particularly strong given strong yearend pipelines and commentary that gain-on-sale trends are still pretty healthy."
Declining expenses is also expected to be a theme this quarter, as banks finally see material reductions in their outlay to maintain and market repossessed real estate. "Those most levered to improving environmental costs" according to Usdin include
First Horizon National (FHN),
Regions Financial (RF),
Synovus Financial (SNV), and
SunTrust (STI - Get Report).
In regard to bank investors' thirst for higher interest rates and wider net interest margins, Usdin said that during the first quarter, "the market appeared to pull forward the potential for the Fed to raise rates sooner than anticipated," in "a marked contrast to fall 2011, when most investors assumed that a near-zero Fed funds rate and a 2.0% 10-year Treasury bond yield would linger for years."
Late in the third quarter, the big theme was the expanded return of capital through dividend increases and share buybacks, approved by the
Federal Reserve as part of the regulators annual bank holding company stress tests. Usdin said the capital returns approved by the Fed "were generally larger-than-expected, both in terms of dividend increases and share buyback authorizations," and that for some bank holding companies, "total payout ratios could approach 100% of earnings over the next twelve months."
Jefferies estimates that "usage of excess capital available at year-end '13 could provide an 8% average lift to EPS and add an additional percentage point to [return on tangible equity] for the large/mid-caps over time," while "for the [small to mid-caps], deployment in outer years could drive EPS and ROTE higher by 13% and two percentage points, respectively."
Factoring in net interest margin prospects, loan growth estimates, return off capital, expense management, credit quality improvement and market action, here are Jefferies' top
five bank stock picks heading into earnings season. The group is in ascending order, by the upside potential implied by the firm's revised 12-month price targets: