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A Golden Opportunity for Bank Stock Investors?

NEW YORK (TheStreet) -- After two stellar years of recovery, bank stocks have been sinking and investors are no doubt wondering whether or not the emerging markets worry has presented a buying opportunity.

The KBW Bank Index (I:BKX) rose 30% during 2012 and then rose 35% during 2013. The index was down 3% year-to-date during January, closing Friday at 67.33. A 3% pullback really isn't much when considering the returns over the previous two years, and can be made up over a few strong days.

But a deeper look at the index tells another story. All but five 24 component stocks were down during January:

  • Bank of America's (BAC - Get Report) shares returned 7.6% through Friday's close at $16.75.
  • BB&T (BBT) of Winston-Salem, N.C., was up slightly to $37.41.
  • PNC Financial Services Group (PNC) of Pittsburgh was up 3.5% to $79.88.
  • Regions Financial (RF) of Birmingham, Ala., was up 2.8% to $10.17.
  • SunTrust Banks (STI) of Atlanta was up 0.6% to close Friday at $37.02.

Looking at the 24 components of the KBW Bank Index and rounding out the list adding other major banks including Goldman Sachs (GS), Morgan Stanley (MS), Discover Financial Services Group (DFS) and CIT Group (CIT), the worst performer during January, by far, was First Niagara Financial Services Group FNFG of Buffalo, N.Y., sinking 18.6% to close Friday at $8.64. There's good reason for First Niagara's slide, with many investors losing patience after years of underperformance, as the bank made a great expansion through acquisitions, and with last week's announcement of a major four-year investment program the company expects eventually to improve its operating performance.

Bank of America's stock keeps rising as the U.S. economy keeps improving, and the stock trades for 10.3 times the consensus 2015 EPS estimate of $1.62, among analysts polled by Thomson Reuters. That's not a very high forward price-to-earnings ratio, when compared to the routine forward price-to-earnings valuations of over 20 for big banks before the credit crisis, however, it is second-highest among the "big six" U.S. banks, most of which achieved returns on equity that exceeded Bank of America's reported 2013 return on average tangible equity of 7.13%:

  • Shares of Citigroup (C - Get Report) were down 9% during January to close at $47.43 Friday. The shares trade for 8.2 times the consensus 2015 EPS estimate of $5.76 and the company reported a 2013 return on average common equity of 7.1%. That's the cheapest forward P/E among the big six U.S. banks, however, Citigroup derives most of its revenue and earnings from outside the United States, which is especially important when the market is so skittish over emerging market (EM) economies. The company's consensus 2015 EPS estimate has come down over the past few weeks, while the other member of the big-six club have seen their consensus estimates rise. Citigroup also saw a high-profile downgrade all the way to a "sell" rating from a "buy" rating, by Rafferty Capital Markets analyst Richard Bove, last week.
  • JPMorgan Chase (JPM) was down 4.7% during January to close Friday at $55.36. The shares trade for 8.7 times the consensus 2015 EPS estimate of $6.36 and the bank reported a 2013 return on tangible common equity of 11%. Extraordinary items took their toll on JPM during 2013, including $7.2 billion after tax, or $1.85 a share, during the third quarter, as the company set aside reserves to help cover $17.5 billion in fourth-quarter residential mortgage-backed securities settlements with government authorities and regulators. The bank's fourth-quarter earnings were lowered by $1.1 billion after tax, or 27 cents a share, for legal expenses, which included the company's deferred prosecution agreement with the Department of Justice for its role in the Bernard Madoff Ponzi scheme. JPMorgan's stock has the second-lowest forward P/E among the big six.
  • Shares of Wells Fargo (WFC) declined only slightly during January to close at $45.34 Friday. The shares trade for 10.7 times the consensus 2015 EPS estimate of $4.25, and the company reported a 2015 return on equity of 13.87%. The company has little direct exposure to emerging markets which along with its consistently strong performance explains its relatively high forward P/E when compared to its peers among the big six. Then again, for such a strong and consistent performer, with relatively few surprises, Wells Fargo looks like a bargain stock.
  • Morgan Stanley's stock was down 58% during January to close at $29.51 Friday. The shares trade for 9.9 times the consensus 2015 EPS estimate of $2.97, and the company reported a return on average common equity from continuing operations, excluding debit valuation adjustments (DVA), of 5.2% for 2013.
  • Shares of Goldman Sachs were down 7.4% during January to close Friday at $164.12. The shares trade for 9.7 times the consensus 2015 EPS estimate of $16.85, and the company reported a 2013 return on average common equity of 11%.

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