NEW YORK (
) -- JPMorgan analyst Steven Alexopoulos said on Wednesday that bank stock investors should consider locking in gains, heading into first-quarter earnings season, and named
he would "avoid."
The analyst said that "with bank stocks above fair value," it was " a good time to lock in gains in front of the mediocre 1Q12 ahead."
Bank stocks have had an amazing run so far this year, with the
KBW Bank Index
rising 27% year-to-date through Tuesday's close at 49.90, following a 25% drop during 2011.
Two of the largest U.S. bank holding companies are still trading at sharp discounts to book value and very attractive price multiples to forward earnings estimates, despite runaway year-to-date returns:
- Shares of Bank of America (BAC - Get Report) closed at $9.49 on Tuesday, returning 71% year-to-date, following an epic 58% decline during 2011. The shares still 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, among analysts polled by Thomson Reuters. The consensus first-quarter EPS estimate for BAC is 12 cents, with a full-year 2012 estimate of 68 cents.
- Citigroup (C - Get Report) 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. Analysts expect the company to post first-quarter EPS of 99 cents, and EPS of $4.08 for all of 2012.
Turning back to the small and mid-cap names, Alexopoulos said that following a 6% increase in average annual loans during the fourth quarter for the banks covered by JPMorgan, "we look for 3% annualized growth in 1Q on continued [commercial and industrial lending] strength," and for net interest margins to narrow, "although curve steepening and higher mortgage rates could mitigate sec yield pressure."
The analyst said that for "from current valuation levels, for the stocks to be big outperformers vs. the market, we would need to see either (1) loan growth start to make a "V" type recovery or (2) the market would need to believe short-term rates were moving higher in 2013," with JPMorgan seeing "very low odds for either of these potential catalysts to materialize."
"On the flip side," Alexopoulos said, "for the group to materially underperform from here, we think we would need to see either (1) a string of disappointing economic reports or (2) the yield curve flatten," and with "all eyes on the slope of the yield curve," a potential further round of quantitative easing by the Federal Reserve "is a risk factor to current valuations," and "consequently, given the sector run, we would lock in profits."
Saying the "sector positioning favors" the following three names "short," JPMorgan said it "would avoid" the following three small to mid-cap banks, because of "structural challenges to earn above their cost of capital," or "acquisition focused capital return stories."
are rated "Underperform" by JPMorgan.