NEW YORK (
) -- While the banking industry is clearly in recovery mode, numerous economic and regulatory challenges continue to pressure price multiples for some of the best-known financial players.
Using data provided by Thomson Reuters Bank Insight, we isolated the 10 actively traded bank stocks trading at the lowest multiples to consensus 2013 earnings estimates, among analysts polled by Thomson Reuters.
The stocks are limited to those with average daily trading volume of at least 50,000 shares. Our data set also excludes pure investment banks, such as
, which was heavily discounted, with shares trading for less than half their tangible book value and 7.5 times the consensus 2013 EPS estimate of $1.95, based on Friday's closing price of $14.61.
Now that the large banks have finished reporting their second-quarter results, investors are focused on several key challenges and opportunities:
With the Federal Reserve committed to keeping short-term interest rates between zero and 0.25%, while the central bank continues to purchase long-term securities in an attempt to continue bringing down long-term rates, most banks are feeling the squeeze. Since the short rates have remained so low for so long, banks can no longer rely on shrinking funding costs to offset lower rates on new or renewed loans and on securities investments.
In her firm's second-quarter industry Earnings Wrap-up for 134 banks, KBW analyst Melissa Roberts said the industry saw "significant [net interest margin, or NIM] compression... with the median NIM at 3.76%," declining seven basis points year-over-year, and three basis points sequentially. Large regional banks suffered the most, according to KBW, with net interest margins declining by an average of 15 basis points year-over-year, while only 29% of large regionals covered by the firm saw expanding margins.
Credit Quality Improvement.
Large banks continued to lower their quarterly provisions for loan losses, with most releasing reserves over the past several quarters, boosting earnings performance. Roberts said that the median nonperforming assets ratio for banks covered by KBW "52 bps y/y and 17 bps q/q to 2.53%."
KBW said that banks covered by the firm saw average total loans grow by a median of 1% quarter-over-quarter and 4% year-over-year, with large-cap banks fairing the best, with total loans growing 7% year-over-year. Regionals have been focused on growing their profitable non-real estate commercial loan portfolios.
Another growing profit center is residential mortgage lending, with most of the new loans being quickly sold to
and Freddie Mac, for a quick profit, as the banks remove the interest rate risk from their books. Mortgage refinancing is on fire, with the expanded Home Affordable Refinance Program, or HARP 2.0, allowing qualified borrowers with loans held by Fannie or Freddie to refinance their entire loan balances at today's historically low rates, no matter how much the value of the home has declined.
Capital growth and Basel III.
Banks are still building capital, with a median ratio of tangible equity to tangible assets of 8.77% as of June 30, increasing from 8.64% the previous quarter, and 8.58% a year earlier. Most large banks are expecting to be compliant with the
proposed Basel III capital rules many years in advance of January 2019, when the rules will be fully phased in. The larger banks updated their Basel III Tier 1 common equity estimates based on the Fed's capital rules proposed on June 7. On Wednesday, the Fed
the comment period on the new capital rules by 45 days, until October 22.
With the largest banks seeing major pressure on their trading and capital markets revenue, while the smaller banks suffer from margin pressure and slow demand in several loan categories, many banks have large, even branded, efficiency initiatives in place. A bank's efficiency ratio is, essentially, the number of pennies of overhead expense incurred for every dollar of revenue. KBW said the median second-quarter efficiency ratio in its coverage universe was 63.11%, improving from 63.65% in the first quarter, and 64.09% in the second quarter of 2011.
Return of Capital.
After the Federal Reserve completed its annual stress testing of large banks' capital plans in March, many of the biggest players immediately announced dividend increases and significant stock buyback programs. Some banks were required to submit updated capital plans, and some elected to wait another year before requesting permission from the Fed. Investors are clamoring for more dividends, and buybacks, of course, lower the number of outstanding shares, which increases analysts' earnings estimates, supporting higher share prices.
Here are the 10 cheapest bank stocks, among actively traded names, to 2013 earnings estimates, counting down by declining forward P/E ratio: