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7 Undervalued Regional Bank Stocks From Oppenheimer

Among the largest regional banks, U.S. Bancorp (USB) fits the bill. As we discussed in May, USB had the strongest earnings performance among the nation's large-cap banks, with returns on average assets (ROA) improving from 1.15% in 2010 to 1.62% in 2012, according to Thomson Reuters Bank Insight. Over the same period, U.S. Bancorp's return on average common equity (ROCE) rose from 12.67% in 2010 to 17.12% in 2012.

Among big banks in the United States, only Wells Fargo (WFC - Get Report) came anywhere close to similar performance over that period, with ROA improving from 1.00% in 2010 to 1.40% in 2012, and ROCE improving from 11.17% in 2010 to 13.78% in 2012.

U.S. Bancorp's second-quarter ROA was 1.67% and its ROCE was 16.10%. Wells Fargo's ROA during the second quarter was 1.54% and its ROCE was 14.02%.

But these two stocks are relatively costly compared to the very largest banks. U.S. Bancorp's shares closed at $37.54 Friday and traded for 2.9 times tangible book value, according to Thomson Reuters Bank Insight, and for 11.7 times the consensus 2014 earnings estimate of $3.21 a share. Wells Fargo closed at $43.51 Friday and trading for 2.1 times tangible book value, and for 10.9 times the consensus 2014 EP estimate of 4.01.

For investors looking for bargains among the largest banks, the cheapest on a forward P/E basis are:
  • JPMorgan Chase (JPM - Get Report), which closed at $56.05 on Friday and traded for 1.5 times tangible book value and 9.2 times the consensus 2014 EPS estimate of $6.10.
  • Citigroup (C - Get Report), which closed at $52.21 Friday and traded just below tangible book value and for 9.3 times the consensus 2014 EPS estimate of $5.59.

But for investors looking to keep away from the regulatory and political challenges facing the largest banks, there are some bargains out there among regional names, according to McEvoy. Some of these banks trade at significantly higher valuations than the big banks, but these are justified by higher growth rates or other factors, according to the analyst. Here are the seven names rated "outperform" by Oppenheimer,
  • PNC Financial Services Group (PNC - Get Report) of Pittsburgh. The shares closed at $75.90 Friday and traded for 1.5 times tangible book value and 10.9 times the consensus 2014 EPS estimate of $6.96. Oppenheimer's 12-18 month price target for PNC is $78.00. McEvoy's 2014 EPS estimate of $6.65 "suggests core earnings power more in line with higher quality banks" including U.S. Bancorp, M&T Bank (MTB) of Buffalo, N.Y. and BB&T (BBT) of Winston-Salem, N.C., according to McEvoy. The analyst also pointed out that the other three names were trading at over twice their tangible book value. "We believe PNC should trade at 12x our FY14 EPS estimate, or 1.7x tangible book value," he wrote.
  • KeyCorp (KEY - Get Report) of Cleveland. The shares closed at $12.40 Friday and traded for 1.3 times tangible book value and 12.5 times the consensus 2014 EPS estimate of $0.99. McEvoy's price target for the shares is $13, while his 2014 EPS estimate of $1.00. According to Oppenheimer, KeyCorp's peers trade at 13 times forward earnings estimates and 1.7 times tangible book value.
  • FirstMerit (FMER - Get Report) of Akron, Ohio. The shares closed at $22.43 Friday and traded for 2.1 times tangible book value and 14.6 times the consensus 2014 EPS estimate of $1.54. Oppenheimer's price target for the shares is $24, or 14.1 times the firm's 2014 EPS estimate of $1.70. The bank's peers with total assets ranging from $12 billion to $50 billion trade for about 16 times consensus 2014 EPS estimates. "We feel FMER should trade at a slight discount to its peers given the size and complexity of integrating the Citizens Republic acquisition in 2013 as well as $0.15 of 'non-core' purchase accounting accretion included in our 2014 EPS estimate," McEvoy wrote.
  • Cullen/Frost Bankers (CFR - Get Report) of San Antonio. The shares closed at $42.38 Friday and traded for 2.4 times tangible book value and 10.6 times the consensus 2014 EPS estimate of $3.99. As we discussed in May, Cullen/Frost has had the strongest returns on equity among the 24 components of the KBW Bank Index for many years. Oppenheimer's price target for the shares is $76, or 18.5 times McEvoy's 2014 EPS estimate of $4.10.
  • First Midwest Bancorp (FMBI - Get Report) of Itasca, Ill. The shares closed at $15.39 Friday and traded for 1.7 times tangible book value and 14.5 times the consensus 2014 EPS estimate of $1.06. Oppenheimer's price target for the shares is $17, or 16.7 times their 2014 EPS estimate of $1.02. "A renewed and concentrated sales approach should become noticeable in future quarters, specifically with [commercial and industrial] loans and certain fee income areas," McEvoy wrote. "Improving credit and more favorable revenue trends should be the catalysts to improve the valuation of First Midwest."
  • Signature Bank (SBNY - Get Report) of New York. The shares closed at $92.61 Friday and traded for 2.6 times tangible book value and 18.2 times the consensus 2014 EPS estimate of $5.09. Oppenheimer's price target for Signature Bank is $100, or 19.8 times their 2014 EPS estimate of $5.05. "Given the more favorable outlook for SBNY's net interest margin and above-peer balance sheet growth through the end of 2015, we believe SBNY's premium multiple is justified and should be maintained as the company's earnings stream grows," McEvoy wrote.
  • IberiaBank (IBKC - Get Report) of Lafayette, La. The shares closed at $58.10 Friday and traded for 1.6 times tangible book value and 16.3 times the consensus 2014 EPS estimate of $3.57. "Because of the untapped gains from the government-assisted acquisitions of several failed banks, along with "additional upside in many fee-based businesses and the underlying health of the company's balance sheet and organic growth opportunities across the Southeast," McEvoy feels the bank should be trading closer to peers. Oppenheimer's price target for IberiaBank is $62, or 17.4 times the firms' 2014 EPS estimate of $3.55.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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