Get Ready for the Year-End Bank Stock Apocalypse

The Federal Reserve's target federal funds rate has been in a range of between zero and 0.25% since late 2008, and most banks have already seen most of the benefits of lower rates on deposits and borrowings. Meanwhile, the central bank in September increased its monthly purchases of long-term mortgage backed securities -- a move dubbed QE3 -- in an effort to hold long-term rates at their historically low levels, or push them down even further.

Ironically, Regions Financial -- which many analysts considered one of the best-positioned among the regional banks for an expanding net interest margin, because it was asset-sensitive and had faced the margin squeeze early in the cycle -- saw its shares fall 8% on Tuesday, even though the company bucked the industry trend, with its net interest margin expanding by four basis points year-over-year, to 3.08% in the third quarter.

The problem was that the margin narrowed from 3.16% in the second quarter, and net interest income declined to $817 million in the third quarter, from $838 million in the second quarter, and $850 million, in last year's third quarter. Regions CFO David Turner sad during the company's earnings conference call that the company "had guided to 3.13% being kind of the normal recurring margin for the [third] quarter," and that "from that, we had indicated we would be relatively stable." But "obviously QE3 came in the latter part of the quarter."

Mosby says that Regions Financial's "earnings from operations increased by 10% from last quarter, which reflects over 80 cents in annualized earnings power." Investors are looking at a buying opportunity after Tuesday's share-price drop, because of "tangible book value that grew 5% and now exceeds seven dollars," and "earnings power [that] can easily justify an $8 stock price."

Regions closed at $6.54 Tuesday, returning 53% year-to-date, following a 38% decline during 2011.

The shares for 0.9 times their reported Sept. 30 tangible book value of $7.02, and for eight times the consensus 2013 EPS estimate of 80 cents.

Looking at the entire banking sector, Mosby says "while revenues are more challenged, you do have a natural offset with mortgage banking income and cash management fees that are mitigating some of the margin compression. When you couple that with continued efficiency gains and further credit leverage, you get bottom-line earnings continuing the path that we have outlined."

"By the end of next year, we expect the large cap banks will have recovered between 90% 95% of their pre-crisis earnings power."

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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