This Day On The Street
Continue to site right-arrow
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
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Cheapest U.S. Bank Stock May Surprise You

NEW YORK (TheStreet) -- HomeStreet, Inc. (HMST - Get Report) of Seattle is the cheapest U.S. bank stock on a forward price-to-earnings basis, according to data provided by Thomson Reuters Bank Insight.

This may come as a surprise to some investors, because the largest U.S. banks have been trading for years at significantly lower valuations than large regional banks and most publicly traded community banks.

Here are two examples:

Shares of JPMorgan Chase (JPM - Get Report) closed at $58.21 Thursday and traded for 9.2 times the consensus 2015 earnings estimate of $6.33, among analysts polled by Thomson Reuters.  The consensus 2014 EPS estimate is $6.36.  The consensus 2014 EPS estimate is $5.99.

Citigroup (C) is cheaper than JPMorgan on the same basis, closing at $52.27 Thursday and trading for 8.8 times the consensus 2015 EPS estimate of $5.95.  The consensus 2014 EPS estimate for Citigroup is $5.32.

We're using 2015 EPS estimates for price-to-earnings ratios, since sell-side analysts have "turned the page" to go another year out.

While shares both JPMorgan and Citigroup fared quite well during an excellent 2013 for bank stocks and for the broad market, their relatively low valuations reflect the regulatory target on JPMorgan's back, and Citigroup's relatively weak earnings as it continues its transformation, with the wind-down of Citi Holdings.

But HomeStreet is the cheapest of all publicly traded U.S. banks for which consensus EPS estimates are available.  The shares closed at $20.16 Thursday and traded for just 6.2 times the consensus 2015 EPS estimate of $3.25.  Analysts are expecting a major increase in earnings from the 2014 consensus EPS estimate of $2.39.

HomeStreet's shares sank by 20% during 2013, which is a very bad performance when you consider the 35% return for the KBW Bank Index (I:BKX).  That may not be a fair comparison, since the KBW Bank Index mainly includes large-cap bank stocks, but it illustrates just how bad 2013 was for HomeStreet's stock.

The weakness in HomeStreet's shares reflected the reduced expectations for mortgage lending revenue, as rising long-term interest rates slowed the wave of mortgage refinancing activity in the United States.  The Mortgage Bankers Association estimates that originations of one-to-four family mortgage loans declined by 14% during 2013, to $1.755 trillion.  According to the MBA's latest forecast, originations will drop by another 33% to $1.174 trillion during 2014, before rebounding by 5% to $1.229 trillion in 2015.

In addition to lower volume, the rising long-term interest rates have also lowered the gain-on-sale margins for newly originated mortgage loans. 

HomeStreet had $2.9 billion in total assets as of Sept. 30, with operations mainly in the Pacific Northwest and Hawaii.  The company earned $1.7 million, or 11 cents a share, during the third quarter, declining from $12.1 million, or 82 cents a share, in the second quarter, and $22.0 million, or $1.50 a share, during the third quarter of 2012.

The main factor in the lowering of earnings was a decline in gains on the sale of newly originated mortgage loans to $33.5 million in the third quarter from $52.4 million the previous quarter and $68.9 million a year earlier.

On a brighter note, HomeStreet's net interest income grew to $20.4 million during the third quarter from $17.4 million the previous quarter an $16.6 million a year earlier, as the company's balance sheet grew and its net interest margin improved.  The margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- widened to a tax adjusted 3.41% in the third quarter, from 3.10% in the second quarter and 3.12% during the third quarter of 2012.

Another factor in the earnings decline was HomeStreet's continued expansion, which led to an increase in noninterest expenses to $58.2 million during the third quarter, from $56.7 million the previous quarter and $45.9 million a year earlier.

Despite the difficult outlook for mortgage loan originators, both sell-side analysts covering HomeStreet rate the shares a "buy."

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
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

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
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
JPM $62.00 -0.21%
HMST $18.08 0.00%
AAPL $126.41 -1.66%
FB $81.21 0.39%
GOOG $575.33 0.34%

Markets

DOW 18,135.72 +38.82 0.21%
S&P 500 2,101.04 +2.51 0.12%
NASDAQ 4,982.8090 +15.6680 0.32%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs