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Regions Financial: Bank Stock Winner Again

Now that most of the large U.S. banks have announced their first-quarter results, it is quite apparent that "the expense lever is being pulled," according to Kotowski, who also wrote that extraordinary expenses for mortgage litigation and foreclosure costs "still have a long way further to go."

Oppenheimer projects a solid return on tangible common equity among large banks covered by the firm of 13.3% for 2013, improving from 12.9% in 2012 and 10.6% in 2011.

With returns rising, stock valuations "cheap" and "balance sheets improving," Oppenheimer's "recommended list" includes these four banking giants:

  • Citigroup. The shares closed at $47.12 Wednesday, trading for 8.9 times the consensus 2014 earnings estimate of $5.32 a share, among analysts polled by Thomson Reuters. Oppenheimer's price target for Citi's shares is $57.
  • Capital One (COF). The shares closed at $57.06, trading for 8.6 times the consensus 2014 EPS estimate of $6.67. Oppenheimer's price target for Capital One is $69.00.
  • JPMorgan Chase. The shares closed at $48.73, trading for 8.2 times the consensus 2014 EPS estimate of $5.93. Oppenheimer's price target for the shares is $66.
  • Morgan Stanley (MS)
  • . The shares closed at $21.45, trading for 8.5 times the consensus 2014 EPS estimate of $2.53. Oppenheimer's price target for Morgan Stanley is $27.00

Regions

Regions Financial's shares were up again on Wednesday, following a 4% gain on Tuesday, after the Birmingham, Ala., lender reported first-quarter net income available to common shareholders of $327 million, or 23 cents a share, increasing from $261 million, or 18 cents a share, in the fourth quarter, and $145 million, or 11 cents a share, in the first quarter of 2012.

The year-over-year earnings improvement mainly reflected the bank's continued improvement in credit quality. The provision for loan losses declined to $10 million in the first quarter from $37 million the previous quarter and $117 million a year earlier.

Noninterest expense totaled $842 million in the first quarter, declining from $902 million in the fourth quarter and $913 million in the first quarter of 2012. According to the company, professional and legal expenses returned to "a more normalized level" of $31 million in the first quarter from $15 million in the fourth quarter, when Regions "benefitted from $20 million in lower legal reserves." The main factor in the sequential lowering of expenses was $42 million in costs in the fourth quarter to terminate a Real Estate Investment Trust investment.

Regions continued to benefit from the housing market recovery, with expenses to maintain repossessed real estate totaling just $2 million in the first quarter, declining from $6 million the previous quarter and $23 million a year earlier.

Another highlight for Regions in the First quarter was the widening of its net interest margin, running counter to the trend for most large banks in the prolonged low-rate environment. The bank's first-quarter net interest margin expanded to 3.13% in the first quarter from 3.1% in the fourth quarter and 3.09% in the first quarter of 2012.

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