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Discover Tops List of Cheapest Banks With Greatest Returns

Stocks in this article: JPM WFC USB DFS TAYC STT MTB MBFI

Not only is Discover the cheapest stock to forward earnings among the group of 11 we identified, the company has been the strongest earnings performer by far, with ROTCE ranging from 14.79% to 19.05% over the past five quarters.

KBW analyst Sanjay Sakhrani in a phone interview on Tuesday said some investors were frustrated at Discover's relatively low valuation and discussed the possibility of the company unlocking value by selling its payment processing network.

Sakhrani rates Discover "outperform," with a $61 price target.

Here are the next five cheapest stocks among 11 actively traded U.S. bank holding companies achieving ROTCE of over 15% over each of the past five quarters, by descending forward P/E ratio:

Shares of Taylor Capital Group (TAYC) of Rosemont Ill., closed at $23.01 Tuesday, returning 27% this year. The shares trade for 15.1 times the consensus 2014 EPS estimate of $1.52. The company's ROTCE has ranged from 15.49% to 24.13% over the past five quarters. Taylor Capital has a deal in place to be acquired by MB Financial (MBFI) of Chicago, which is expected to be completed by the end of the year. For each share, Taylor Capital shareholders will receive 0.64318 shares of MBFI common stock and $4.08 in cash. That comes to a slight premium of $23.19 a share, based on MBFI's closing price of $29.71 on Tuesday.

Next is State Street (STT) of Boston, with shares closing at $70.80 Tuesday, for a year-to-date return of 52%. The shares trade for 13.6 times the consensus 2014 EPS estimate of $5.19. The company's ROTCE has ranged from 15.45% to 21.92% over the past five quarters. Please see TheStreet's earnings coverage for a discussion of the company's third-quarter results.

M&T Bank (MTB) of Buffalo has seen its stock return 15% this year through Tuesday's close at $111.43. The shares trade for 13.1 times the consensus 2014 EPS estimate of $8.49. The bank is a strong performer, with ROTCE ranging from 18.03% to 22.39% over the past five quarters.

M&T in August 2012 agreed to acquire Hudson City Bancorp of Paramus, N.J, in a deal originally valued at about $3.7 billion in cash and stock. The merger was expected to be completed during the second quarter, but the two companies in April announced that the time needed to gain regulatory approval of the deal would be "extended substantially," because M&T had "learned that the Federal Reserve has identified certain regulatory concerns with M&T's procedures, systems and processes relating to M&T's Bank Secrecy Act and anti-money-laundering compliance program."

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