NEW YORK (TheStreet) -- Investors late to the bank stock rally may prefer to load up on "cheap" bank stocks, but not all of them are necessarily bargains.
According to KBW analyst Christopher Mutascio, investors have been buying stocks that trade at low price-to-tangible book multiples on the premise that such stocks would have more upside as they are currently "under-earning."
"That may or may not be the case," the analyst wrote, adding, "Some banks may be 'cheap' on a P/TBV measure because they have materially lower-than-peer profitability today and in the future. So their discounted P/TBV multiple may be justified and warranted."
For these banks to achieve "industry-like profitability" -- a return on tangible equity (ROTE) of 12.6% and return on assets (ROA) of 1.21%, investors will have to make "some pretty aggressive assumptions." These banks may struggle to achieve such targets given the fact that fee income is unlikely to move the needle, in the analyst's opinion, while loan loss provisioning is already well below historical levels. That means the only two drivers of profitability would be net interest margins and efficiency ratio. For Keycorp to earn a ROTE of 12.6%, it will have to generate a net interest margin of 4% and an efficiency ratio of 52% or a combination of 3.6%/55.3%. That compares to a NIM of 3.3% and efficiency ratio of 67.2%.
Regions will have to earn a NIM of 3.5% and efficiency ratio of 54.7% compared to current levels of 3.13% and 64.9%. SunTrust will have to generate NIM of 3.53% and efficiency ratio of 59% compared to 3.33% and 60.2% -- "the most feasible of the three banks" in Mutascio's view. -- Written by Shanthi Bharatwaj in New York. >Contact by Email. Follow @shavenk
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- 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 + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV