NEW YORK (TheStreet) -- Northern Trust
(NTRS - Get Report) of Chicago led large-cap U.S. banks higher on Friday, with shares rising 2.3% to close at $60.63.
The Dow Jones industrial Average
The GDP growth estimate was raised from 3.6%, which itself was a huge upward revision from the first estimate of 2.8%. Economists polled by Reuters had expected the latest GDP growth estimate to remain at 3.6%.
The revision comes in the wake of the Federal Open Market Committee's decision on Wednesday to taper the Federal Reserve's "QE3" purchases of long-term bonds to $75 billion a month from $85 billion, starting in January. The latest upward revision to the GDP growth rate also adds confidence in the 7.0% U.S. unemployment rate for November, which was a significant improvement from 7.3% in October.
The KBW Bank Index (I:BKX) was up 0.5% to 68.35, with all but two of the 24 index components seeing gains for the session. The index has risen 33% this year, after rising 30% during 2012.
FBR analyst Paul Miller on Friday in his "2014 Financial Services/Real Estate Outlook," pointed out that the credit leverage many big banks have enjoyed over the past through years, as the release of loan loss reserves boosted earnings, was coming to an end.
Miller said 2014 would be the "Year of the Regulator," which may have seemed strange, considering the regulatory onslaught the big banks have faced this year. 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," the analyst wrote.
"We expect that those subsectors most levered to a continued recovery in housing will outperform in 2014, as housing-levered industries should have the largest opportunities for growth in the near term," Miller wrote. Among large-cap banks, Miller favors U.S. Bancorp (USB) and Capital One (COF). The analyst also included Flagstar Bancorp FBC, New Residential Investment Corp. NRZ and American Homes 4 Rent AMH among his top five picks for next year.
Shares of Northern Trust have returned 24% this year. The shares trade for 17.7 times the consensus 2014 earnings estimate of $3.43 a share, among analysts polled by Thomson Reuters, and for 15.7 times the consensus 2015 EPS estimate of $3.86.
Out of 21 sell-side analysts polled by Thomson Reuters, three rate Northern Trust a "buy," while, 12 have neutral ratings and five rate the shares "underperform."
The somewhat negative bias among analysts reflects Northern Trust's relatively modest return on average tangible common equity (ROTCE) of 10.42% for the first three quarters of 2013, while its much larger rivals focusing on trust, asset management and securities custody have achieved much more impressive returns, according to Thomson Reuters Bank Insight. Bank of New York Mellon (BK) achieved an ROTCE of 15.12% for the first three quarters, while State Street (STT) of Boston did even better with an ROTCE of 18.30%.
"Northern Trust['s] operating margin and earnings are likely to remain under pressure due to higher regulatory costs and, hence, we remain
relatively underweight given valuation premium versus earnings results," JPMorgan analyst Vivek Juneja wrote in a note to clients on Dec. 9.
The following chart shows the performance this year of Northern Trust against the KBW Bank Index and the S&P 500:
NTRS data by YCharts
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