3 Regional Bank Stock Best Bets From KBW

NEW YORK (TheStreet) -- KBW on Wednesday raised its price targets for three regional banks that carry "Outperform" ratings, with improved mortgage banking as the main theme for the first quarter.

Following KBW's universal banks first-quarter earnings preview, the firm on Wednesday published its preview for regional banks, which included a number of upward earnings estimate revisions, with implied upside from "early signs of macro-economic improvement and real estate recovery in distressed regions, in particular in the Southeast," with "less incremental impact" for banks in less-stressed regions.

With banks still facing a threat to their net interest margins -- the difference between the average yield on loans and investments and the average cost for deposits and wholesale borrowings -- in the prolonged low-rate environment, KBW said that "earnings contraction" could disappoint investors with "overly optimistic expectations."

Looking at the three banks that KBW rates "Outperform," for which the firm raised price targets on Wednesday, there is an interesting contrast for long-term investors who have strong confidence in the unfolding U.S. economic recovery. These three banks trade for at least 1.4 times tangible book value, according to HighlineFI, and multiples to consensus 2013 earnings estimates -- among analysts polled by Thomson Reuters. Multiples range from 10 to 12.5, painting quite a contrast with three of the largest U.S. banks:

• Shares of Bank of America (BAC) closed at $9.49 on Tuesday, returning 71% year-to-date, following an epic 58% decline during 2011. Despite that remarkable run, the shares trade for just 0.7 times the company's Dec. 30 tangible book value of $12.95, and for a relatively low nine times the consensus 2013 EPS estimate of $1.06. KBW analyst Jefferson Harralson rates Bank of America "Market Perform," with a price target of $9.00, and estimates the company will report first-quarter EPS of six cents, followed by full-year earnings of 65 cents, and 2013 EPS of $1.20.
• Citigroup (C) closed at $36.37 Tuesday, returning 38% year-to-date, following last year's 44% decline. Like Bank of America, Citi's shares are heavily discounted, at just 0.7 times the Dec. 30 tangible book value of $49.81. The shares trade for eight times the consensus 2013 EPS estimate of $4.70. KBW analyst David Konrad rates Citi "Market Perform," with a price target of $42, and estimates the company will report first-quarter EPS of 80 cents, with full-year earnings of $3.40 for 2012, followed by 2013 EPS of $4.40.

• Shares of JPMorgan Chase (JPM) closed at $45.42 Tuesday, returning 38% year-to-date, following a 20% decline during 2011. The shares trade for 1.5 times tangible book value, and for eight times the consensus 2013 EPS estimate of $5.52. Based on a quarterly payout of 30 cents, the shares have a dividend yield of 2.64%, and the company's board of directors has authorized $12 billion in share buybacks for 2012, followed by another $3 billion for the first quarter of 2013. Konrad rates JPMorgan "Outperform," with a price target of $52, estimating the company will post first-quarter earnings of $1.07, followed by EPS of six dollars.

The following are quick summaries for the three regional banks rated "Outperform" by KBW, for which the firm raised price targets on Wednesday.

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