NEW YORK (
) -- UBS analyst Stephen Scinicariello recommends three regional banks for investors seeking to limit exposure to events in Europe while minimizing regulatory worries at home.
UBS said on Tuesday that "mid-cap regional bank stocks are down 6% on average over the past quarter due to a return of concerns pertaining to global macroeconomic events," but because of "their lack of direct exposure to these risks and favorable relative positioning in the new regulatory paradigm, we continue to see several attractive opportunities."
Heading into second-quarter earnings season, Scinicariello projects for the 12 midcap banks covered by his firm sequential loan growth of roughly 2%, with "modest" pressure on net interest margins, continued improvement in credit quality and "solid expense management, "which should translate into higher pretax pre-provision run rates (+4%)."
The "provision" refers to banks' quarterly provisions for loan losses, which have a direct effect on quarterly earnings.
Scinicariello said that "regional bank valuations are attractive," at less than 1.5 times tangible book value and 12 times "forward earnings; especially considering the EPS growth we anticipate for 2013," and that "better-than-feared fundamentals should continue to lead to revaluation of the sector."
The analyst said that "the fundamental distinction across the banking sector is becoming increasingly apparent with the largest, more complex institutions on one end of the spectrum and the regional banks on the other." This is made quite apparent when comparing valuations for the largest three U.S. banks to those of the three regional names favored by UBS, which trade for at least 8.5 times consensus forward earnings estimate:
- Shares of JPMorgan Chase (JPM) closed at $35.32 Monday, returning 8% year-to-date, following a 20% decline during 2011. The shares trade for 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for less than seven times the consensus 2013 EPS estimate of $5.32, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.35. Based on a 30-cent quarterly payout, JPMorgan's shares have a dividend yield of 3.40%.
- Bank of America (BAC - Get Report) closed at $7.60 Monday, returning 37% year-to-date, after dropping 58% during 2011. The shares trade for 0.6 times their reported March 31 tangible book value of $12.87, and for less than eight times the consensus 2013 EPS of a dollar. The consensus 2012 EPS estimate is 58 cents.
- Shares of Citigroup (C - Get Report) closed at $26.75 Monday, returning 2% year-to-date, following a 44% decline during 2011. The shares trade for just over half their reported March 31 tangible book value of $50.90, and less than six times the consensus 2013 EPS of $4.60. The consensus 2012 EPS estimate is $4.02.
Scinicariello said that his firm believes "that there has been a secular shift in the industry due to the new regulatory paradigm which favors regional banks," since the application of new regulatory capital rules announced on June 7 "would only cost capital ratios approximately 70 [basis points] on average," for the midcap banks covered by UBS. Therefore, "to the extent regional bank stocks continue to be characterized as being the undifferentiated from larger-cap institutions, we view this as an opportunity."
In the "slow growth" domestic economic environment, UBS continues "to expect regional banks to continue to take market share and continue to grow."
Here are the three buy-rated midcap bank names for which "relative value appears quite attractive," according to UBS: