This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Citigroup Cuts Regional Banks

Stocks in this article: WFCHBANKEYCMAZIONSIVB

NEW YORK ( TheStreet) -- "Most regional bank stocks don't offer much upside given their current valuations," according to Citigroup analyst Keith Horowitz.

Continuing what now seems to be an annual pattern for the banking space, with a strong first quarter, followed by a weakening outlook for the rest of the year, Citigroup on Friday cut its 2013 earnings estimates for 13 out of 16 large regional banks in the firm's coverage universe, while lowering price targets for 10 of the companies.

In light of the "flattening of the yield curve that has taken place since 1Q12 earnings season," -- with short-term rates unable to go much lower, while the yield on 10-year U.S. treasuries slipped below 1.5% last week -- Citigroup said that "the primary driver of the lower estimates is, not surprisingly, net interest margin, or NIM compression, particularly from the substantially lower reinvestment rates banks will face as legacy loans and securities are repaid or mature."

A bank's net interest margin is its average yield on loans and investments, less its average cost for deposits and wholesale borrowings.

Horowitz said that bank treasurers attending Citigroup's annual conference for treasurers two months ago "expected the 10-year treasury to be in the 2.00% to 2.10% range by year-end - almost 50 bps higher than the current yield," and that the "mismatch between expectations and reality suggests that bank treasurers have their work cut out for them."

Citigroup sees a "slow burn" for the regional banks, as "lower expectations for long rates only fully manifests itself over time as it lowers expected reinvestment rates, steadily reducing expected yields on fixed rate assets as loans and securities re-price ." If rates "were to stay flat through 2014, we estimate NIMs could fall by a further ~10 bps," said Horowitz.

Most regional banks continue to see very strong deposit growth, and, of course, seek to avoid being locked into very long terms for their new securities investments, because of the low rates. Horowitz said that yields on mortgage-backed securities have generally "shrunk less than the recent move seen in Treasuries," because "an investor is much less willing to pay-up significantly above par for MBS pass throughs given risk the bond will be called back in a year or two at par."

According to Citigroup, the average yield for a select group of Fannie Mae and Freddie Mac MBS with "effective durations of 1-3 years that are likely in the zone of plain vanilla options for bank treasurers," declined to 2.06% as of June 6, from 2.42% at the end of March.

On the bright side, the Federal Reserve's new capital rules excluding trust preferred shares from Tier 1 capital will enable banks to "activate a contractual clause allowing them to redeem TruPS at par," according to Horowitz, allowing the banks "to redeem relatively expensive debt, which has an average cost of 7.4% for the group" or regional banks covered by Citi, "with some securities carrying a coupon in excess of 10%."

Horowitz said that "redeeming TruPS will create a near term NIM lever for the group as they are able to replace the TruPS with alternative capital at a minimum, or preferably using debt or excess cash should create a modest tailwind near-term."

The following are the three regional bank holding companies within the firm's coverage universe facing the "most significant" impact from compressed net interest margins through 2014, according to Citigroup's "flat rate scenario," followed by the three for which "flat rates have the least incremental impact,"

1 of 7

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,390.52 +195.10 1.13%
S&P 500 2,018.05 -2.75 -0.14%
NASDAQ 4,630.7410 +64.6030 1.41%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs