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TheStreet Open House

Regions Financial Rises as Market Falls

NEW YORK ( TheStreet) -- Regions Financial (RF - Get Report) was the banking sector winner on a weak day for the broad market, with shares rising 2.1% to close at $10.08.

The Dow Jones Industrial Average was down 0.3%, while the S&P 500 pulled back 0.25% and the NASDAQ Composite ended 0.4% lower, following disappointing economic reports at home and in China.

The KBW Bank Index (I:BKX) rose 0.4% to 69.71, with 13 of the 24 index components ending with gains.

The Institute for Supply Management said its Non-Manufacturing Index (NMI) for December was 53.0%, down from 53.9% the previous month.  A reading above 50% indicates expansion, and the NMI has been above 50% for 48 consecutive months.  But after a wave of strong fourth-quarter economic data, economists polled by Thomson Reuters on average had expected the December NMI to come in at 55.2%.

The ISM said that is non-manufacturing New Orders Index for December came in at 49.4%, down from 50.1% the previous month, for its first contraction in 52 months.

Sterne Agee chief economist Lindsey Piegza in a note to clients on Monday wrote that the December ISM data shows a "clear loss of Momentum" over the past four months, which "underscores the uncertainty still heavily embedded in the outlook for the U.S. economy over the next 6-12 months."

Earlier on Monday, the HSBC/Markit Economics purchasing managers' index for service industries in China declined to 50.9 in December, from 52.5 in November.  The December figure was the lowest level since August 2011, following other reports last week showing slowing manufacturing activity in China.

The U.S. Senate was expected to hold its confirmation vote on Janet Yellen's nomination to succeed Ben Bernanke as Federal Reserve chair, at 5:30 p.m. ET.

The major piece of banking news on Monday was that JPMorgan Chase (JPM - Get Report) was ready to pay the Department of Justice and federal regulators over $2 billion for its role in the Bernard Madoff Ponzi scheme.  The settlement could come as early as Tuesday, according to the reports.  The company's shares were up 0.7% to close at $59.10.

JPMorgan had tried very hard to put as much of its legal risk behind it during the fourth quarter, which included $17.5 billion in settlements of investigations and lawsuits tied to the sale of residential mortgage-backed securities, leading into the credit crisis.

Madoff's return to the headlines makes this a good time to reflect on why sophisticated investors fall for Ponzi schemes.

Regions Financial

As part of his fourth-quarter industry earnings preview on Friday, Deutsche Bank analyst Matt O'Connor upgraded Regions Financial of Birmingham, Ala., to a "buy" rating from a "hold" rating.  "While we don't expect short term rates to rise for a while, RF is one of the most levered to rising interest rates in general and trades well below similar asset sensitive banks," including  Comerica (CMA) of Dallas, KeyCorp (KEY) of Cleveland and Zions Bancorporation (ZION) of Salt Lake City, Utah.

Shares of Regions trade for 11.2 times the consensus 2015 earnings estimate of 90 cents a share, among analysts polled by Thomson Reuters.  This is significantly lower forward price-to-earnings ratio than the ratios for the other three banks well-positioned for rising interest rates mentioned above.

Comerica closed at $47.09 Monday and trades for 14.4 times the consensus 2015 EPS estimate of $3.27.

KeyCorp closed at $13.46, trading for 12.0 times the consensus 2015 EPS estimate of $1.12.

Zions trades for 14.2 times the consensus 2015 EPS estimate of $2.09, based on Monday's closing price of $29.65.

Long-term interest rates rose significantly during 2013 as investors anticipated the Federal Reserve's tapering of "QE3" bond purchases, which have been meant to hold down long-term rates.  The market yield on 10-year U.S. Treasury bonds was 2.96% Monday, compared to 1.70% at the end of April. 

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