This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Two Bank Stock Picks for 2014, 'Year of the Regulator'

NEW YORK (TheStreet) -- Following a fantastic recovery for U.S. bank stocks over the past two years, investors may wish to focus on quality, rather than credit recovery and valuation recovery, in 2014.

In his "2014 Financial Services/Real Estate Outlook,"  FBR analyst Paul Miller on Friday included U.S. Bancorp (USB - Get Report) and Capital One (COF - Get Report) among his "top five stocks for 2014." 

"In Washington, 2014 will be the year of the regulator," Miller wrote.

You may be scratching your head at this statement, since 2013 surely has been an amazing year for regulators in their efforts to punish banks for their mortgage sins during the real estate bubble, and has also seen the finalization of Basel III capital rules, the finalization of regulations to implement the Volcker Rule's ban on proprietary trading for banks, new liquidity rules and the announcement of an expanded list of banks subject to annual Federal Reserve stress tests.

But the Senate's recent approval of Majority Leader Harry Reid's (D., Nev.) proposal to lower the number of votes required to break filibusters blocking confirmation votes for presidential appointees to 50 from 60 will allow "for greater control over confirming regulators and judges [and] is likely the beginning of a more aggressive regulatory stance," Miller's report contends.

"It is clear that many in Washington want to expand mortgage credit availability, and the debate will focus on their success. The Consumer
Financial Protection Bureau (CFPB) remains a significant source of focus and has recently added overdraft fees and payday loans to its 2014 regulatory agenda," it goes on.

So the major transformation of the banking business is going to continue.

On a brighter note, Miller says investors "should pay attention" to the efforts of incoming Federal Housing Finance Agency director Mel Watt's efforts to expand consumers' access to mortgage credit, through changes of underwriting requirements at Fannie Mae F(NMA) and Freddie Mac (FMCC).  The analyst also expects "actions by the CFPB to loosen credit.  Those actions could provide a boost for the two mortgage-focused names among Miller's top five picks, which are Flagstar Bancorp (FBC), and New Residential Investment Corp. (NRZ).

Miller's remaining top pick for 2014 is American Homes 4 Rent (AMH).

For the big banks, Miller expects continued slow balance sheet growth, but he does expect banks' net interest margins "to begin to climb at a modest pace."

Credit leverage has been a major theme for the largest banks for several years, as they release excess loan reserves, which is typical during an economic recovery.  But the big reserve releases are coming to an end, which brings us back to a focus on quality.

U.S. Bancorp and Capital One have both put up impressive numbers this year.  USB's return on average tangible common equity for the first three quarters was 24.18%, according to Thomson Reuters Bank Insight, while Capital One's ROTCE was 17.02%.  Please see TheStreet's earnings coverage for details on third-quarter results for U.S. Bancorp and Capital One.

U.S. Bancorp's shares closed at $40.04 Thursday.  The shares have returned 28% this year and trade for 12.5 times the consensus 2014 earnings estimate of $3.20 a share, among analysts polled by Thomson Reuters, and for 11.6 times the consensus  2015 EPS estimate of $3.46.

Miller on Friday raised his price target for USB to $50 from $42, "reflecting 14x FY15 consensus of $3.50 and 15x our FY14 EPS estimate of $3.25."  Miller expects a continued strong return on equity to "bode well" for an expanded forward price-to-earnings ratio, during a year that will be "otherwise lackluster for banks, as the demand for credit remains relatively weak and employment gains continue to be minimal."

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
COF $81.30 0.00%
USB $45.21 0.00%
AAPL $121.30 0.00%
FB $94.01 0.00%
GOOG $625.61 0.00%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs