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TheStreet Open House

The Cheapest Bank Stocks Based on 'Normalized' Earnings: KBW

Stocks in this article: BAC JPM KEY MBI

The Federal Open Market Committee completes its two-day meeting Wednesday, which will be followed by a policy statement at 2 p.m. EDT. Investors will be looking for any change in language confirming whether the central bank's bond-buying may be reduced, as early as September.

Looking Ahead to 2016

Mutascio on Tuesday published a report that included 2016 earnings estimates for large-cap banks covered by KBW under three interest rate scenarios. All three scenarios assume the banks' efficiency ratios and loan loss provision ratios "migrate to 20-year medians."

The first scenario assumes no expansion of net interest margins (NIM) from second-quarter levels. Bank of America's NIM was a relatively low 2.44%, although it expanded from 2.43% in the first quarter and 2.21% during the second quarter of 2012. JPMorgan Chase reported a core second-quarter NIM of 2.20%, narrowing from 2.37% the previous quarter and 2.47% a year earlier.

The second scenario is the "most optimistic, with substantial NIM expansion," while the third scenario "generally assumes the midpoint between the current and 20-year median NIMs."

Under the third "midpoint" scenario, KBW estimates Bank of America will earn $1.85 a share during 2016, with JPMorgan Chase expected to earn $6.30 a share.

Based on Tuesday's closing price of $14.52, Bank of America's shares were trading for just 7.9 times Mutascio's 2016 EPS estimate under the third scenario. JPMorgan Chase was the second cheapest on that basis, with shares closing at $55.33, or 8.8 times KBW's 2016 EPS estimate.

Each of the nation's two largest banks has special circumstances holding the shares back in the eyes of investors. Despite making so much progress working through its legacy mortgage problems mainly springing from the purchase of Countrywide Financial in 2008, Bank of America still had unresolved mortgage repurchase claims against the company totaling $16.648 billion as of June 30. That was down from $17.135 billion the previous quarter, mainly because of the bank's settlement with bond insurer MBIA (MBI - Get Report).

JPMorgan Chase faces a number of regulatory investigations, after on Tuesday agreeing to settle Federal Energy Regulatory Commission charges of market manipulation for $410 million. According to a New York Times DealBook report on Wednesday, JPMorgan's "new and conciliatory approach" to settling with regulators may not be completely successful, as "government officials, stung by the bank's past displays of hubris, may drive up the price of settlements or resist the overtures altogether." JPMorgan's "hubris" includes continued success in making boatloads of money. The bank brought home record earnings in 2012 of $21.3 billion, or $5.20 a share, despite taking at least $6.2 billion in losses from the "London Whale" hedge trading losses.

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