NEW YORK (
) -- Even after a bank-stock rally, there are still hundreds of smaller companies whose shares are trading below book value.
Among the largest, only a few were below tangible book at the end of January. Guggenheim Securities analyst Marty Mosby says that when a bank trades below tangible book value, "it's about risk management."
"As you get to tangible book value, a bank has to produce profitability in excess of its cost of equity, in order to justify a
to tangible book value," he says.
KBW Bank Index
rose 30% during 2012 and went up another 5% in January, as investors digested another earnings season underscoring the industry's credit recovery and revenue challenges.
Using data provided by Thomson Reuters Bank Insight,
has compiled a list of actively traded bank stocks that traded below tangible book value at the end of January. It's limited to banks for which year-end data were available and to stocks with average daily trading volume of at least 50,000 shares. The list is also limited to the 10 banks with the highest operating returns on average assets (ROA) during 2012.
Of course, the price-to-book ratio is only one of many things to consider when picking bank stocks. Investors must also consider the timeline for greater profitability to support higher values.
One of the most familiar names still trading below book value is
Bank of America
(BAC - Get Report)
, which didn't make the cut for our list because the company's 2012 ROA was only 0.19%. The company's shares closed at $11.32 Thursday, trading for 85% of their reported Dec. 31 tangible book value of $13.36.
Mosby rates Bank of America "buy," with a $14 price target, which he says "represents what tangible book value would be as we move into 2014."
Despite another year of mediocre earnings performance and plenty of lousy headlines, Bank of America's stock was the 2012 bank champion. No bank has more at stake in the unfolding U.S. housing recovery, mainly because of former CEO Ken Lewis's unfathomable decision for the company to take on Countrywide Financial's mortgage disaster in July 2008. Investors' unresolved mortgage repurchase claims against the company totaled $28.3 billion as of Dec. 31, increasing from $25.5 billion the previous quarter, and $12.6 billion a year earlier.
Bank of America on Jan. 17 reported a fourth-quarter profit of $700 million, or 3 cents a share, after the company pre-announced a large
mortgage putback settlement
. The company also made a major contribution to the
$8.5 billion foreclosure settlement
between federal regulators and the nation's largest loan servicers.
The Fannie settlement was a pivotal event, because the company's earnings presentation implied that its mortgage repurchase claims would decline by roughly $12.2 billion, bringing repurchase claims down to about $14.5 billion. Of course, that figure doesn't include new repurchase claims that may crop up during the first quarter, but it shows major progress.
And every additional economic report showing improvement in the U.S. housing market makes investors more comfortable about the company's success in weathering the mortgage storm.
Bank of America CEO Brian Moynihan said during the company's earnings conference call that the company had achieved "strong results" in strengthening its balance sheet, increasing its estimated Basel III Tier 1 common equity ratio to 9.25% as of Dec. 31. The Basel III ratio was already significantly above the 8.5% that will be required in January 2019, when the Federal Reserve's enhanced capital requirements for systemically important financial institutions are fully phased in.
When discussing the company's cost-cutting efforts, Moynihan said "we have reduced our employee count in each quarter in the last five and we have done that while we continue to invest in our targeted growth areas," and that "we reduced our delinquent mortgage count, which allowed us to reduce our [legacy asset servicing] expenses," according to a transcript provided by Thomson Reuters.
Mosby said in a report following the earnings release that "even though BAC has absorbed almost $10 billion in losses and charges over the last six quarters to resolve some of its mortgage-related issues, it has not posted a quarterly loss and tangible book value per share has grown 6%." The analyst also estimated "a range for potential remaining after-tax losses of $10 billion to $20 billion as compared to BAC's estimated current earnings power of around $10 billion a year."
Mosby estimated that "as the remaining overhang issues continue to be resolved, or at least reduced, we believe BAC's discount to tangible book value should lessen to around 5%, or about $10 billion in expected losses."
Another familiar name that didn't make our list of 10 most profitable banks trading below tangible book value, despite a decent 2012 ROA of 0.58%, is
Hudson City Bancorp
of Paramus, N.J. The bank was excluded from the list because it
agreed in August to be acquired
of Buffalo, N.Y., in a cash-and-stock deal that was valued at $3.7 billion.
Another profitable company trading below tangible book value that was excluded from the list is
Citizens Republic Bancorp
of Flint, Mich., which in September agreed to be acquired by
of Akron, Ohio, in an all-stock deal that was valued at $912 million.
The following are the 10 most profitable bank stocks trading below tangible book value, for which year-end data were available Friday. The list is ordered by ascending ROA: