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California Banks Are Sitting Pretty, Says KBW

NEW YORK (TheStreet) -- Stocks of California community banks in urban areas trade at premium valuations, but the group is well-positioned to outperform banks in other areas of the country, according to KBW analyst Julianna Balicka.

"Many of the publicly traded California banks are market leaders in their niches, sectors or local footprints. Therefore, we would be overweight metropolitan California banks as a group in the coming year, and would feel comfortable with most choices as sound stock picks," Balicka wrote in a note to clients Tuesday.

Out of nine California community banks rated "outperform" by KBW, the "best idea for 2014," according to Balicka, is PacWest Bancorp (PACW - Get Report) of Los Angeles. Balicka's price target for the shares is $49, implying upside of 9% from Wednesday's closing price of $44.85.

PacWest's shares trade for 15.2 times the consensus 2015 earnings estimate of $2.96 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $2.47. Based on a quarterly payout of 25 cents, PacWest's shares have a dividend yield of 2.23%.

Balicka estimated the bank will earn $2.45 a share this year, but is out in front of the consensus estimating EPS will grow to $3.20 in 2015.

PacWest had $6.5 billion in total assets as of Dec. 31, and has a deal in place to acquire its Los Angeles competitor Capital Source (CSE) for about $2.3 billion in stock and cash. Capital Source had $8.9 billion in total assets as of Dec. 31. The deal is expected to be completed before the end of the first quarter. "We believe that the long‐term impact to earnings from the CSE [merge of equals] will be significant. The deal was well received at announcement, but we believe there is more upside after integration, as the earnings power of the Combined Company gains traction," Balicka wrote.

Here are the other eight California community banks rated "outperform" by Balicka:

BBCN Bancorp (BBCN) of Los Angeles. The shares closed at $17.40 Wednesday and traded for 13.7 times the consensus 2015 EPS estimate of $1.27. The consensus 2014 EPS estimate is $1.18. Balicka's price target for the shares is $17.50. "In our view, BBCN is using 2014 as a year of building for the future: investing in new loan and fee products; the bank's organization and infrastructure, and in better utilization of the branch network," she wrote.

Cathay General Bancorp (CATY) of Los Angeles. The shares closed at $25.29 Wednesday and traded for 14.3 times the consensus 2015 EPS estimate of $1.77. The consensus 2014 EPS estimate is $1.66. Balicka's price target for the shares is $26.00. "As profitability and capital overhangs are resolved, we believe that the bank's valuation multiples will catch up to other 'high‐growth' peers -- in our view, CATY is a high grower that has been flying under the radar," the analyst wrote in her note on Wednesday.

CVB Financial (CVBF)of Ontario. The shares closed at $15.99 Wednesday and traded for 15.7 times the consensus 2015 EPS estimate of $1.02. The consensus 2014 EPS estimate is 94 cents. KBW's price target for the shares is $18, and Balicka believes 2014 is the bank's "year to deploy capital" through acquisitions.

East West Bancorp (EWBC) of Pasadena. The shares closed at $36.09 Wednesday and traded for 14.4 times the consensus 2015 EPS estimate of $2.51. The consensus 2014 EPS estimate is $2.27. Balicka's price target for the share is $41.00 "EWBC is the dominant Chinese American bank, with high growth, strong asset sensitivity and active capital management."

First Republic Bank (FRC - Get Report) of San Francisco. The shares closed at $52.58 Wednesday and traded for 15.3 times the consensus 2015 EPS estimate of $3.44. The consensus 2014 EPS estimate is $3.08. With its focus on jumbo mortgage lending, while building out a national base for its private banking services, First Republic has been one of the fastest growing U.S. bank's over the past several years. Balicka's price target for the shares is $55.00.

Hanmi Financial (HAFC) of Los Angeles. The shares closed at $24.08 Wednesday and traded for 13.5 times the consensus 2015 EPS estimate of $1.78. The consensus 2014 EPS estimate is $1.39. Please see Buy Hanmi Financial Stock Now, Says KBW, for more on the Korean-American bank's expansion.

SVB Financial (SIVB) of Santa Clara. The shares closed at $123.63 Wednesday and traded for 22.2 times the consensus 2015 EPS estimate of $5.56. The consensus 2014 EPS estimate is $5.27. Balicka's price target for the shares is $130.00. "SIVB, Silicon Valley's premier franchise, is market dominant in its sector and continues to generate high rates of balance sheet growth with very strong asset sensitivity; as such, the company deserves premium multiples, in our view, and is strongly positioned for both 2014 and 2015," Balicka wrote.

Wilshire Bancorp (WIBC) of Los Angeles. The shares closed at $10.50 Wednesday and traded for 12.4 times the consensus 2015 EPS estimate of 85 cents. The consensus 2014 EPS estimate is 79 cents. Balicka's price target is $11.50. According to the analyst, two recent acquisitions have mitigated the bank's legacy credit problems, making KBW "constructive on what is otherwise a solidly growing Korean‐American bank with attractive profitability."

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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