This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
$1 buys you full access to ALL of TheStreet's Subscription Services! Learn More

'Quality' Bank Stocks Gain in Favor

Stocks in this article: BACCWFCUSBFITBKEYCMA

NEW YORK ( TheStreet) -- It may finally be time for bank-stock investors to favor quality names.

Until now, the big money has been made on shares of banks recovering from losses and a slowdown in lending.

The KBW Bank Index (I:BKX) is up 7% this year through Friday's close, following a 30% return in 2012. Last year's gain was heavily influenced by two major recovery plays: Bank of America (BAC), which was up 110% after plummeting 58% in 2011, and Citigroup (C), which rose 51%, following a 44% drop in 2011.

With the bank-stock rally continuing, this is a good time for investors to consider quality over recovery potential, as major players with strong earnings performance are trading for relatively low premiums to earnings estimates. Stifel Nicolaus analyst Christopher Mutascio said in a report Monday that "the market is allowing investors to purchase low-risk franchises with strong management teams that are generating profitability ratios well in excess of the industry's average at 'no extra charge.'"





Bank stocks are charging ahead, in part, because of the rapid rise in the yield on 10-year U.S. Treasuries. The Federal Reserve is planning to keep short-term rates at a record low until the U.S. unemployment rate improves to 6.5%. Some banks are poised for significant earnings improvement if this widening of the yield curve holds.

But some investors see the advancing yield on the 10-year benchmark bond as a sign that the central bank will move faster on raising short-term rates, which would cause a "parallel" increase in long-term rates and improve profitability for nearly all banks.

"The recent rally in bank stocks on the erroneous view that an increase in the 10-year U.S. Treasury yield is a significant driver of improved earnings or on the false notion that the Fed will raise short-term interest rates in the near-term has resulted in very little differentiation in the valuations between highly profitable banks and those that aren't as profitable," Mutascio wrote.





Bank of America and Citigroup, unlike the regional banks, are still trading at significant discounts to book value. Bank of America's shares closed at $11.76 Friday, trading for a relatively low 9.1 times the consensus 2014 earnings estimate of $1.29, among analysts polled by Thomson Reuters. Citigroup is at 8.1 times the consensus 2014 EPS estimate of $5.18, based on Friday's closing price of $42.68.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,827.75 +12.81 0.07%
S&P 500 2,072.83 +5.80 0.28%
NASDAQ 4,787.3170 +29.0650 0.61%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs