NEW YORK (TheStreet) -- It would be a tall order to repeat last year's performance for large-cap bank stocks, but some of the industry's best-known names are still trading at very attractive valuations to book value and earnings estimates.
JPMorgan Chase analyst Vivek Juneja said in a report on Wednesday that he expects "bank stocks to be choppy near term, but benefit over time as equity fund inflows continue and [the] economy recovers gradually."
The theme of equity inflows was underscored in a report by Jefferies analyst Daniel Fannon on Wednesday. After a "really bad" December, when investors pulled $20 billion from equity funds as the fiscal cliff debate continued in Washington, "total active equity inflows have equaled almost $15B," during the first several weeks of 2013.
In his review of fourth-quarter earnings for nine of the nation's largest bank holding companies, Juneja said that results were "mixed, with strong and higher than expected [commercial and industrial] loan growth and investment banking fees, and further improvement in credit metrics," which was offset by narrowing net interest margins (NIM) for regional banks, and by declining trading revenue.Juneja also noted that money center banks saw expanding net interest margins, and that "mortgage banking revenues remained strong, but spreads are starting to compress somewhat." Economic reports continue to underline the long-term recovery of housing prices in the United States, which is lowering banks' credit costs. Meanwhile, mortgage lenders had a very strong 2012, amid the boom in refinancing in a time of record-low rates. But the spread between mortgage loan rates and mortgage-backed securities yields is narrowing, meaning that banks will be receiving lower premiums on the sale of newly originated loans. Looking ahead, Juneja expects "EPS growth to slow at regional banks in 2013 but increase at money center banks which are recovering." JPMorgan expects earnings growth to be "led on average by further decline in credit costs, controlled growth in expenses, and share repurchases."
Juneja on Wednesday lowered his rating for U.S. Bancorp (USB) to "neutral" from "overweight," while lowering his price target for the shares to $37.50 from $39.50. The analyst said that U.S. Bancorp had benefitted from the credit crisis, "by growing additional businesses to drive revenue growth faster than peers over last couple of years - notably mortgage originations, which offset slowdown in payments processing fee growth." But Juneja lowered his rating for the shares because he expects "the gap in revenue growth for USB to narrow versus peers," as the company's newer businesses mature and mortgage revenue declines. U.S. Bancorp has indeed stood out through the credit crisis, remaining profitable every quarter, while most of its large-cap banking peers did not. The company has continued to outperform during the credit recovery. Early this month, USB was featured by TheStreet among the eight actively traded banks that had managed to achieve returns on average tangible equity of at least 10% for every quarter since the end of 2009. For all of 2012, U.S. Bancorp's operating return on average assets (ROA) was 1.62%, according to Thomson Reuters Bank Insight, ranking it first among the 24 components of the KBW Bank Index (I:BKX). Wells Fargo (WFC) came in second with an ROA of 1.41%. U.S. Bancorp's shares closed at $33.33 Tuesday, equating to 2.6 times tangible book value, which is a high valuation in the current environment. The shares trade for 10.1 times the consensus 2014 earnings estimate of $3.30, among analysts polled by Thomson Reuters. Juneja said that "the stock is appropriately valued and the valuation premium reflects USB's higher profitability." "Therefore, with slowing revenue growth gap and appropriate valuation, we are downgrading USB to Neutral relative to peers as these will make it difficult for the stock to outperform peers." Of course, you get what you pay for, and most sell-side analysts' price targets only take a 12-month outlook. Juneja said that "longer term, USB remains one of the best managed companies in our universe with a diverse array of revenues." U.S. Bancorp earned $2.87 a share during 2012. JPMorgan estimates the company's EPS will rise to $3.10 in 2013 and $3.30 in 2014.
Here are the four large-cap banks with "buy" ratings from JPMorgan Chase, sorted by forward price-to-earnings ratios, based on consensus 2014 earnings estimates:
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