NEW YORK (TheStreet) -- Deutsche Bank analyst Matt O'Connor on Friday summarized fourth-quarter results for 15 large-cap banks by suggesting that investors stick with bank stocks with the most leverage to macroeconomic themes.
"Overall, 4Q bank results were largely in line with expectations," O'Connor said, saying that at this point in the banking industry's recovery, "is to remain selective overall. We prefer stocks with leverage to macro themes--such as slowing consumer deleveraging, housing improvement, and growth in consumer spending."
With the Federal Reserve keeping its target range for the short-term federal funds rate in a range of zero to 0.25% since late 2008, a major industry theme has been the narrowing of net interest margins (NIM). The margin is the spread between the average yield on loans and securities investments, and the average cost for deposits and borrowings. O'Connor said that among the 15 large-cap, nine reported sequential narrowing of net interest margins, although "NIM pressure from lower yields on both loans and securities was partially offset by additional benefits from lower funding costs (including the calling of TruPs, runoff of higher cost deposits, and debt reduction)," and other factors.
Despite the narrowing margins, the group managed to grow its net interest income slightly during the fourth quarter, driven by a 1.2% quarter-over-quarter increase in average loans, along with "market-based [net interest income] for the money centers," including Bank of America (BAC), according to O'Connor.Capital markets results for the fourth quarter were "better than expected," according to O'Connor, declining 10% on average from the third quarter (excluding the distortion of debit and credit valuation adjustments), but rising between 25% and 30% from a year earlier. "Ibanking fees were strong across the board (+20% q/q and 56% y/y on average), driven by stronger fees across all categories." The analyst said that "mortgage results were strong and will remain so" although he added that "while some expenses will come out when revenues eventually decline, we believe expense declines represent just 20-30% of the decline in production revenue (given gain on sale spreads likely come in, along with volumes)." A continuing theme for many large over the past few years has been the earnings benefit from the release of loan loss reserves that were built up at the height of the credit crisis. O'Connor said that "credit costs have reached normalized levels for many, and banks with meaningful loan growth could actually report higher provisions later this year and into 2014," which will have an effect on earnings.
O'Connor downgraded Goldman Sachs (GS) to a "Hold" rating from a "Buy" rating, saying that the shares were up 50% since August, and that although the shares had lagged Bank of America (BAC), Citigroup (C) and Morgan Stanley (MS) "a bit," they had outperformed JPMorgan Chase (JPM) "by 1600 bps." Goldman reported fourth-quarter earnings of available to common shareholders of $2.833 billion, or $5.60 a share, increasing from $1.458 billion, or $2.85 a share in the third quarter, and $978 million, or $1.84 a share, in the fourth quarter of 2011, with large increases in both debt and equity underwriting revenue; continued strength in institutional client servicing revenue, which was up 4% sequentially and 42% year-over-year to $4.342 billion; and increases of 9% sequentially and 126% year-over-year in investing and lending revenue, to $1.973 billion. O'Connor raised his 2012 earnings estimate for Goldman Sachs to $13.24 from $12.26 and raised his 2014 EPS estimate to $14.40 from $14.00 and said that the stock was now trading "in line" with his 2013 earnings estimate and "a 15-20% premium" to his estimates for 2014 and 2015. He added that "GS also trades at a 15-20% premium on tangible book vs. peers," and that "one could argue both more regulatory uncertainty on earnings (see below) and less of a cost savings story from here." The following are the five large-cap bank stocks with "Buy" recommendations from O'Connor, ranked by descending forward ratios of price to consensus 2014 earnings estimates:
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