Another negative trend heading into earnings season is a decline in "credit leverage," which is a natural part of a bank recovery cycle. "Earnings growth for the largest 100 regional banks continues to slow as the benefits of lower credit costs lessen each quarter," McEvoy wrote.
Following years of loan loss reserve builds during the credit crisis, banks have been "releasing" reserves as expected, which has provided a boost to earnings results. As more banks' reserve levels come down to the appropriate levels based on anticipated loan charge-off activity, the temporary boost to earnings comes to an end. While this natural during a credit recovery, it can add to investors' negativity this earnings season.
Here's a quick summary of McEvoy's favorite bank stocks heading into earnings, all of which he rates "outperform."
Shares of BB&T of Winston-Salem, N.C., closed at $32.66 Tuesday, returning 15% this year. The shares trade for 10.6 times the consensus 2014 EPS estimate of $3.08. The consensus 2013 EPS estimate is $2.92.BB&T is scheduled to announce its third-quarter results on Oct. 17, with analysts estimating net income of $493 million, or 70 cents a share, declining from 77 cents the previous quarter, but increasing from 66 cents a year earlier. McEvoy's 12-to-18-month price target for BB&T is $40. "Over the past 15 years, shares of BB&T have traded at approximately 12.5x price-to-forward earnings," he wrote, adding that "Given the company's growth prospects, diversified revenue stream, recent footprint expansion and expectations for increased capital returns in 2014, we feel BB&T's multiple will expand the average again." The analyst's price target for BB&T is based on a multiple of 12.5 times his 2014 EPS estimate of $3.20. Oppenheimer's 2014 EPS estimate for BB&T is $3.05.
KeyCorpKeyCorp of Cleveland has seen its stock return 36% this year, closing at $11.30 Tuesday. The shares trade for 11.3 times the consensus 2014 EPS estimate of $1.00. The consensus 2013 EPS estimate is 89 cents. The company will report on Oct. 16, with analysts expecting third-quarter earnings of $204 million, or 22 cents a share, matching EPS for the previous quarter, but down a penny from 23 cents a year earlier.
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