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Get Ready for the Year-End Bank Stock Apocalypse

Stocks in this article: BAC C JPM WFC RF I:BKX

The blended earnings growth rate for the group is a negative 2.4%, while the blended earnings growth rate is a negative 0.8%. That's a pretty poor showing in the midst of an economic recovery.

Less Support from Forward EPS Estimates

Over the past few years, forward earnings estimates have significantly exceeded the current year's estimates, for nearly all of the big banks. Long-term investors have seen many recovery plays, cheaply priced to book value and forward earnings estimates, with higher forward estimates supporting stock prices.

Looking at the 24 components of the KBW Bank Index (I:BKX), this situation has changed, as seven of the components have consensus EPS 2013 estimates -- among analysts polled by Thomson Reuters -- lower than the estimates for 2012. It's only fair to point out that among these seven names, SunTrust's (STI) 2013 EPS estimate of $2.53 is much lower than the 2012 estimate of $3.56, mainly because the company booked $1.40 a share in additional earnings in the third-quarter, mainly from the company's sale of its Coca-Cola (KO) shares.

For the rest of the index components expected to see an earnings decline next year, slowing commercial loan growth, pressures on net interest margins, and the eventual slowing of the mortgage refinance wave are among the challenges factored-in by analysts.

With many of the large regionals facing such earnings headwinds, Goldman Sachs analyst Richard Ramsden on Monday recommended that investors consider Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo , because of "relatively low P/E multiples," less reliance on net interest income, and "greater offsets from expense / capital leverage." Here's a quick summary those multiples:

  • Citigroup's shares closed at $36.89 Tuesday, returning 40% year-to-date, following a 44% decline during 2011. The shares trade for 0.7 times their reported Sept. 30 tangible book value of $52.70, and for 8.0 times the consensus 2013 EPS estimate of $4.63. For patient investors, Citi looks to be an eventual capital return story, as new CEO Michael Corbat continues former CEO Vikram Pandit's "good bank/bad bank" strategy to free up capital by placing run-off access within Citi Holdings, and possibly speeds up the process.
  • JPMorgan Chase closed at $41.33 Tuesday, returning 28% year-to-date, following a 20% decline last year. The shares trade for 1.2 times tangible book value, according to Thomson Reuters Bank Insight, and for 7.8 times the consensus 2013 EPS estimate of $5.30. Based on a quarterly payout of 30 cents, the shares have a dividend yield of 2.90%.
  • Shares of Wells Fargo closed at $33.87 Tuesday, returning 25% year-to-date, following a 10% decline during 2011. The shares trade for 1.7 times tangible book value, and for 9.3 times the consensus 2013 EPS estimate of $3.63. Like JPMorgan, Wells Fargo has an attractive dividend yield, which was 2.60% as of Tuesday's close, based on a quarterly payout of 22 cents a share. While the company has a higher forward P/E than Citi or JPMorgan, Wells Fargo has also boasted a return on average assets of 1.27% and a return on average tangible common equity of 15.16% for the 12-month period ended Sept. 30, according to Thomson Reuters Bank Insight, greatly exceeding the rest of the big four club.

Among the 24 components of the KBW Bank Index, Bank of America (BAC) is expected to see the greatest earnings growth, with a consensus EPS estimate of 95 cents, increasing from a 2012 estimate of just 41 cents, in part because of $1.6 billion in litigation expenses during the third quarter, which included the settlement of a class action lawsuit related to the 2009 acquisition of Merrill Lynch, and "a charge of $0.8 billion related to the repricing of certain deferred tax assets due to a reduction in the U.K. corporate tax rate" which together lopped 28 cents from the company's third-quarter earnings.

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