Updated from 12:58 p.m. ET with confirmation of Bank of America's settlement with MBIA.
NEW YORK (
) -- There are still bargains out there in Bank Stock Land.
Even though the
KBW Bank Index
is up 11% this year through Friday's close, following last year's 30% return, there are still 21 active bank stocks trading below 10 times consensus 2014 earnings estimates.
In an interview last week, FIG Partners analyst John Rodis said that at the end of April, the 17 small and midcap banks he covers were trading for an average of 13.8 times 2014 earnings estimates. This is a much higher average multiple than that of banks with over $50 billion in total assets, which traded as a group for 10.1 times forward earnings estimates, according to FIG Partners data.
Forward P/E multiples are much lower for the big banks because of a difficult growth environment, pressure on net interest margins, and because of investor mistrust in the wake of the credit crisis and industry bailout. The big banks have been focused on cutting expenses in order to hit their numbers.
Using data supplied by the crack team of analysts at
Thomson Reuters Bank Insight
, we have identified the 10 actively traded bank stocks with the lowest forward price-to-earnings ratios. For similar lists in previous articles we have defined "actively traded" as stocks with average daily trading volume of 50,000 shares. This time we have lowered that number to 20,000, to bring more variety to the list.
Even though most banks have repaid government bailout funds received through the Troubled Assets Relief Program, or TARP, with the program earning a profit for taxpayers according to the U.S. Treasury, regulatory and political scrutiny of the nation's largest banks is continuing to hold back their stock valuations. The most recent political move against the big banks is the
. The bill -- sponsored by Senators Sherrod Brown (D., Ohio) and David Vitter (R., La.) -- would greatly raise the largest banks' capital requirements while having the U.S. "walk away" from the Basel III agreement and risk-based capital rules. Under Brown-Vitter, the banks' capital requirements for the safest investments, including cash and U. S. Treasury obligations, would be the same as for junk bonds.
There's little chance of the Brown-Vitter bill passing, but the bill reflects the continued distrust of banks in Washington, along with the opportunistic bashing of large banks which is to be expected in light of the real estate crisis and the bailout. Then again, we are nearly three years into the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has done a great deal to strengthen the oversight of the big banks, including annual stress tests by the
. All of the large banks have greatly strengthened their capital levels over the past several years.
The fallout against
over last year's "London Whale" hedge trading loss continues, with CEO James Dimon being told by regulators from the Office of the Comptroller of the Currency and the Federal Reserve last month that they didn't trust the bank's management, according to reports in the Wall Street Journal. Dimon is set to hold a meeting with a large group of OCC examiners. Dimon also faces a vote at the company's annual shareholders meeting on May 21, to give up his position as chairman of the board of directors.
Rafferty Capital Markets analyst Richard Bove on Monday
. In a note to clients, Bove wrote that "Jamie Dimon joined the executive team of JPMorgan Chase in 2005. In that year, JPMorgan earned $8.5 billion. In 2012, the company earned $21.7 billion. The pretax, pre-provision results per share went from $4.41 to $8.62 or a gain of 95.5%." The analyst added that "from the end of 2005 to last Friday, the stock price has risen by 19.9%. In this same period the Keefe Bruyette banking Index has fallen by 39.5%. JPMorgan has outperformed its peers by approximately 60% over this timeframe."
Regulators are justified in applying extra scrutiny to JPMorgan Chase's risk management practices, however, when deciding whether or not to "punish" Dimon by taking away one of his titles, investors should keep their ultimate goal at heart, which is to make money.
There's more on JPMorgan Chase below, as the company made the list of 10 cheapest bank stocks to forward earnings estimates.
Our selection approach brings several smaller banks to the list, while excluding the following large banks:
- Bank of America (BAC) - Get Bank of America Corp Report. The company's shares closed at $12.24 Friday, returning 6% this year, after more than doubling during 2012. Despite the run-up, the shares trade just below tangible book value, according to Thomson Reuters Bank Insight, and for 9.3 times the consensus 2014 earnings estimate of $1.31, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is 99 cents. Bank of America continues to work through its legacy mortgage repurchase claims. The latest piece of good news for the company is that various institutional investors, including the Federal Home Loan Bank of San Francisco, the attorneys general of New York and Delaware and the Federal Housing Finance Agency, have dropped their objections to the bank's $8.5 billion proposed settlement in June 2011 of mortgage putback claims related to loans originally securitized by Countrywide Financial. Bank of America acquired Countrywide in 2008, and set aside reserves to cover the settlement in the second quarter of 2011. JPMorgan analyst Vivek Juneja said in a note to clients late on Friday that "this removes several objectors to the settlement - few others remain, most notably American International Group (AIG) - Get American International Group, Inc. Report. Juneja pointed out that "the hedge fund that started the objection process, Walnut Creek (Baupost), already withdrew its objection to the deal." He added that "there has been significant overhang on Bank of America's stock because of fears about this settlement being overturned and this should reduce some of those concerns." More of Bank of America's mortgage overhang was removed on Monday, and in a very big way, as the company and MBIA (MBI) - Get MBIA Inc. Report announced a " comprehensive settlement" of claims against the bank by the bond insurer. As part of the settlement, Bank of America will extend a $500 million credit line to MBIA. In turn, Bank of America will receive warrants allowing the bank to purchase 9.94 million MBIA shares for $9.59 a share, which can be exercised at any time through May 2018. MBIA's shares rose 45% to close at $14.29, putting Bank of America "in the money" on the warrants, by $4.70 per MBIA share, or approximately $46.7 million. Bank of America's shares were up over 5% to close at $12.88.
- Discover Financial Services (DFS) - Get Discover Financial Services Report. The shares closed at $45.93 Friday, trading for 9.6 times the consensus 2014 EPS estimate of $4.80. The consensus 2013 EPS estimate is $4.56. Discover achieved a very strong first-quarter return on equity of 27%, and with its consistent earnings performance and continued growth, seems like a steal right here. Please see TheStreet'searnings coverage for details on the company's financial performance.
- Wells Fargo (WFC) - Get Wells Fargo & Company Report. The shares closed at $37.74 Friday, returning 11% this year, following a 27% return during 2012. The shares trade for 9.7 times the consensus 2014 EPS estimate of $3.90. The consensus 2013 EPS estimate is $3.68. Wells Fargo has been one of the strongest and consistent earnings performers among large banks through the credit crisis and recovery. The company's first-quarter return on tangible common equity was 16.75%, according to Thomson Reuters Bank Insight. Based on a quarterly payout of 30 cents, the shares have a dividend yield of 3.18%. The company in March said it had received Federal Reserve approval for "a proposed increase in common stock repurchase activity for 2013 compared with 2012." Wells Fargo's common share buybacks during 2012 totaled $3.9 billion.
Here are the 10 actively traded bank stocks trading at the lowest multiples to 2014 consensus earnings estimates:
10. Horizon Bancorp
of Michigan City, Ind., closed at $19.18 Friday, down 2% year-to-date, following a 74% return during 2012. The shares trade for 1.3 times their reported March 31 tangible book value of $14.64, and for 8.9 times the consensus 2014 earnings estimate of $2.14 a share. The consensus 2013 EPS estimate is $2.29.
Based on a quarterly payout of 10 cents, the shares have a dividend yield of 2.09%.
Horizon Bancorp reported first-quarter net income to common shareholders of $5.2 million, or 58 cents a share, compared to $5.0 million, or 56 cents a share, in the fourth quarter, and from $4.5 million, or 59 cents a share, in the first quarter of 2012.
The bank reported $3.1 million in gains on the sale of mortgage loans during the first quarter, declining from $4.0 million the previous quarter, but increasing from $2.3 million in the first quarter of 2012. The decline was typical for most banks in the first quarter, with reduced mortgage loan refinancing activity, as well a narrowing of gain-on-sale spreads for the sale of new loans.
Horizon achieved a solid return on average assets (ROA) of 1.24% and a return on average common equity of 14.11% during the first quarter.
KBW analyst John Barber has a "market perform" rating on Horizon Bancorp, with a price target of $21, saying in a note to clients on April 18 that "Horizon continues to post solid results and peer leading profitability metrics." The analyst added that over the long haul, lower mortgage activity and additional expenses from the acquisition of Heartland Bancshares of Franklin Indiana last July, "represent earnings headwinds; however, the company remains opportunistic and well positioned to continue growing the core franchise."
Interested in more on Horizon Bancorp? See TheStreet Ratings' report card for this stock.
9. Capital One Financial
Capital One Financial
closed at $58.52 Friday, returning 1% this year, following a 37% return during 2012. The shares trade for 1.2 times tangible book value, according to
Thomson Reuters Bank Insight
, and for 8.9 times the consensus 2014 EPS estimate of $6.61. The consensus 2013 EPS estimate is $6.35.
Following a dismal fourth quarter, when the company missed earnings and revenue estimates, blaming seasonal factors but also reducing its 2013 outlook based on the results, Capital One came back with first-quarter results that beat analysts' expectations.
The company reported first-quarter net income of $1.1 billion, or $1.79 a share, compared to $843 million, or $1.41 a share in the fourth quarter, and $1.4 billion, or $2.72 a share, in the first quarter of 2012.
The year-earlier period included a $594 million bargain purchase gain from the acquisition of ING Direct (USA). Excluding that gain, first-quarter 2012 earnings were $809 million, or $1.56 a share, underscoring Capital One's success in the most recent quarter.
The company's first-quarter ROA was 1.41% and its return on average tangible common equity was a solid 15.56%.
Oppenheimer analyst Oppenheimer analyst Chris Kotowski rates Capital One "outperform," with a 12- to 18-month price target of $69.00. In a note to clients late on April 18, the analyst said that "COF's 1Q13 was a tad better than we expected and way better than our worst fears."
While the first-quarter results were boosted by a release of loan loss reserves that added 23 cents a share to the bottom line, the results were "still a dime better than expected," Kotowski wrote.
Kotowski estimates Capital One will earn $6.71 a share this year, with EPS rising to $6.86 in 2014. "COF remains one of our top picks," he wrote. "Operating
return on tangible common equity was 16.5%, the card business is resilient and granular with generally good earnings visibility and should fetch more that 8x current year's earnings."
Interested in more on Capital One Financial? See TheStreet Ratings' report card for this stock.
8. First Defiance Financial
First Defiance Financial
of Defiance, Ohio, closed at $21.89 Friday, returning 15% this year, following a 33% return during 2012. The shares trade for 1.1 times tangible book value, and for 8.8 times the consensus 2014 EPS estimate of $2.49. The consensus 2013 EPS estimate is $2.09.
Based on a quarterly payout of 10 cents, the shares have a dividend yield of 1.83%.
The company reported first-quarter net income of $5.6 million, or 55 cents a share, increasing from $5.2 million, or 52 cents a share, in the fourth quarter, and $4.2 million, or 37 cents a share, in the first quarter of 2012. Like most of the banks in this group of 10, first-quarter returns were good, with an ROA of 1.09% and a return on average tangible common equity of 11.81%.
KBW analyst John Barber rates First Defiance "outperform," with a $24 price target, saying in a note to clients on April 24 that he was "pleased" to see the company's provision for loan losses decline to $425,000 in the first quarter from $2.6 million in the fourth quarter, and its annualized ratio of net charge-offs to average loans improve to 0.18% in the first quarter from 0.59% the previous quarter.
The provision for loan losses is the amount added to loan loss reserves each quarter. Net charge-offs are loan losses less recoveries.
Interested in more on First Defiance Financial? See TheStreet Ratings' report card for this stock.
closed at $46.97 Friday, returning 19% this year, following a 51% return during 2012. The shares trade for 0.9 times tangible book value, and for 8.7 times the consensus 2014 EPS estimate of $5.39. The consensus 2013 EPS estimate is $4.64.
Investors reacted very favorably after Citigroup on April 15 reported first-quarter earnings of $3.81 billion, or $1.23 a share, compared to earnings of $1.2 billion, or 38 cents a share, in the fourth quarter, and $2.93 billion, or 95 cents a share, in the first quarter of 2012. The fourth-quarter results had included $1 billion in pretax expenses tied to the company's
announced in December.
for full details on Citi's first-quarter results.
KBW analyst Frederick Cannon rates Citigroup "outperform," with a price target of $55, and said in note to clients on April 28 that despite being "the most global of the largest U.S. banks," the company could also "be one of the biggest beneficiaries of rising U.S. home prices this year."
Within Citi Holdings -- into which noncore assets have been placed to run off, as part of Citigroup's "good bank/bad bank" long-term strategy -- there were $98.3 billion in total U.S. loans as of March 31, including $86.1 billion residential mortgage loans.
With only residential mortgage loans making up just 7% of Citigroup's total assets, Citigroup "is least affected by reduced mortgage banking fees," Cannon wrote. But when analyzing the effect on 2013 earnings estimates for six of the largest U.S. banks on a 20% decline in mortgage origination fees, a 20% reduction in net loan charge-offs, along with a 10% reduction in expenses on nonperforming assets, Cannon determined that Citigroup would see an 8% boost to earnings. This was second only to Bank of America, and ahead of the projected benefit of rising home prices to
PNC Financial Services Group
, JPMorgan Chase, Wells Fargo, and
Cannon estimates Citigroup will earn $4.75 a share this year, with earnings increasing to $5.90 a share in 2014.
Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.
6. First PacTrust Bancorp
First PacTrust Bancorp
of Irvine, Calif., closed at $11.67 Friday, down 4% this year, following a 25% return during 2012. The shares trade just below tangible book value, and for 8.6 times the consensus 2014 EPS estimate of $1.35. The consensus 2013 EPS estimate is 77 cents.
With a quarterly payout of 12 cents, the shares have an attractive dividend yield of 4.11%.
First PacTrust hasn't yet reported its first-quarter results. The company had $1.7 billion in total assets as of Dec. 31, increasing 69% from a year earlier, through the acquisitions of Beach Business Community Bank of Manhattan Beach, Calif., and Gateway Business Bank of Cerritos, Calif. The company also has a pending deal to acquire Private Bank of California, of Century City, in a stock deal valued at about $50 million when the deal was announced in August. Private Bank of California had $674 million in total assets as of March 31.
For all of 2012, First PacTrust Bancorp reported net income available to common shareholders of $4.6 million, or 40 cents a share, improving from a net loss of $3.3 million, or 28 cents a share, during 2011. First PacTrust reported a fourth-quarter net loss to common shareholders of $3.2 million, or 30 cents a share, compared with a net loss of $5.6 million, or 52 cents a share, a year earlier. The fourth-quarter results were lowered by a $429,000 reversal of bargain purchase gains previously booked after the Gateway acquisitions. The company also said that fourth-quarter noninterest expenses were "higher as a result of merger related costs associated with the Company's third quarter acquisitions, as well as expenses related to expansion of PacTrust Bank's residential mortgage lending business."
KBW analyst Jacquelynne Chimera said in a note to clients on March 3 that First PacTrust's "mortgage banking income was $14.4 million in the quarter ($0.83/ share)."
"We expect the next few quarters to remain volatile as the company continues to integrate the Beach and Gateway platforms, close its pending acquisition of The Private Bank of California (still guided to close in 2Q13), roll its subsidiaries into one bank, and further develop its business line items," Chimera wrote.
First PacTrust is obviously a long-term expansion play. Chimera rates the shares "market perform" and estimates the company will earn 60 cents a share this year, with EPS rising to $1.05 in 2014.
Interested in more on First PacTrust Bancorp? See TheStreet Ratings' report card for this stock.
5. Monarch Financial Holdings
Monarch Financial Holdings
of Chesapeake, Va., closed at $10.93 Friday, returning 34% this year, following a 31% return during 2012. The shares trade for 1.3 times their reported March 31 tangible book value of $8.63, and for 8.1 times the consensus 2014 EPS estimate of $1.35. The consensus 2013 EPS estimate is $1.08.
Based on a quarterly payout of five cents, the shares have a dividend yield of 1.83%.
The company had $1.1 billion in total assets as of March 31 and reported first-quarter net income of $3.5 million, or 33 cents a share, compared to $3.8 million, or 37 cents a share, in the fourth quarter, and $2.5 billion, or 25 cents a share, during the first quarter of 2012. Following the industry trend, Monarch's mortgage banking income declined to $16.2 million in the first quarter from $23.8 million the previous quarter and $16.6 million a year earlier.
Monarch's first-quarter ROA was 1.27% and its return on average equity was a solid 15.86%.
Interested in more Monarch Financial Holdings? See TheStreet Ratings' report card for this stock.
4. JPMorgan Chase
Shares of JPMorgan Chase closed at $47.57 Friday, returning 10% this year, following a 36% return during 2012. The shares trade for 1.3 times tangible book value, and for 8.0 times the consensus 2014 EPS estimate of $5.97. The consensus 2013 EPS estimate is $5.52.
Following the completion of the Federal Reserve's 2013 bank stress tests, JPMorgan said on March 14 it would be required to "submit an additional capital plan by the end of the third quarter addressing the weaknesses identified in the Firm's capital planning processes." The good news for investors was that the company received the Fed's blessing to raise its quarterly dividend to 38 cents from 30 cents, and also to repurchase up to $6 billion in common shares through the first quarter of 2014.
Based on Friday's closing price, the shares had a dividend yield of 3.20%.
The company's first-quarter ROA was 0.99% and its return on average tangible common equity was an impressive 17.77%, according to
Thomson Reuters Bank Insight
. Please see
for much more on JPMorgan Chase's first-quarter results and analysts' reaction.
With bank regulators continuing to press JPMorgan and with the political target on the company's back, the shares may continue to be discounted for some time, despite solid overall earnings performance over the long term. Then again, the harsh scrutiny of the company could ultimately be a silver lining for investors, with JPMorgan Chase doing everything it can to improve its risk management.
Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.
3. Oriental Financial Group
Oriental Financial Group
of San Juan, Puerto Rico, closed at $16.20 Friday, returning 22% this year, following a 13% return during 2012. The shares trade for 1.2 times their reported March 31 tangible book value of $13.72, and for 7.9 times the consensus 2014 EPS estimate of 2.05. The consensus 2013 EPS estimate is $1.55.
With a quarterly payout of 6 cents, the shares have a dividend yield of 1.48%.
The company had $8.7 billion in total assets as of March 31 and reported first-quarter net income available to common shareholders of $17.7 million, or 37 cents a share, improving from a net loss of $23.3 million, or 53 cents a share, in the fourth quarter, and earnings to common shareholders of $9.5 million, or 23 cents a share, in the first quarter of 2012.
During the fourth quarter, Oriental Financial Group purchased the Puerto Rico banking operations of
Banco Bilbao Vizcaya Argentaria SA
for $500 million, with the funding coming from a combination of preferred and common stock offerings. The deal brought on roughly $4.8 billion in assets and $3.5 billion in deposits. Oriental's fourth-quarter results included $22.9 million in losses from balance sheet moves as part of the company's deleveraging plan and $5.0 million in merger related expenses.
As a result of the acquisition and deleveraging moves over the past year, Oriental Financial Group's net interest income increased to $92.6 million in the first quarter from $42.9 million in the first quarter of 2012, while its net interest margin expanded to 4.65% from 2.60% a year earlier.
On a tax-adjusted basis, the first-quarter net interest margin was a remarkable 5.03%, compared to 3.88% a year earlier.
Oriental's first-quarter ROA was 0.95% and its return on average common equity was 10.14%.
Jefferies analyst Emlen Harmon rates Oriental Financial Group a "buy," with a $20 price target, and said in a note to clients on April 30 that first-quarter results "were encouraging, with the company ahead of pace to deliver on guided $1.40 GAAP EPS in '13, and loan growth demonstrating the bank's ability to grow core earnings power."
Harmon estimates the company will earn $1.50 a share this year, with earnings growing to $1.85 a share in 2014.
Interested in more on Oriental Financial Group? See TheStreet Ratings' report card for this stock.
2. Enterprise Financial Services
Enterprise Financial Services
of Clayton, Mo., closed at $14.47 Friday, returning 11% this year, following a 10% decline during 2012. The shares trade for 1.3 times tangible book value, and for 6.7 times the consensus 2014 EPS estimate of $2.15. The consensus 2013 EPS estimate is $1.36.
The company reported first-quarter net income available to common shareholders of $10.0 million, or 53 cents a share, increasing from $4.2 million, or 23 cents a share, in the fourth quarter, and $5.5 million, or 31 cents a share, in the first quarter of 2012.
The sequential earnings improvement mainly reflected a smaller decline in loss-share receivables from the Federal Deposit Insurance Corp., on the acquisition of four failed banks since December 2009. During the first quarter, Enterprise Financial Services booked a negative $4.1 million in loss-share revenue, compared to a negative $8.1 million in the fourth quarter and a negative $3.0 million a year earlier.
The sequential earnings improvement also reflected a decline in credit costs. Total provisions for loan losses were $4.1 million in the first quarter from $6.6 million the previous quarter and $4.0 million a year earlier.
KBW analyst Christopher McGratty rates Enterprise Financial Services "market perform," with a price target of $15.00. The analyst said in a note to clients on April 25 that his price target is based on a price-to-tangible-book ratio of 1.3, "as we believe valuing the shares on P/TBV remains the best method given the inherent volatility of earnings due to FDIC accounting."
Interested in more on Enterprise Financial Services? See TheStreet Ratings' report card for this stock.
of Seattle closed at $21.78 Friday, down 14% this year. The company went public on Feb. 14, 2012, and the shares returned 105% through the end of the year, adjusting for stock splits. The shares trade for 2.0 times tangible book value, and for 5.3 times the consensus 2014 EPS estimate of $4.12. The consensus 2013 EPS estimate is $3.67.
HomeStreet had $2.5 billion in total assets as of March 31. The bank specializes in originating mortgage loans through its HomeStreet Capital subsidiary and quickly selling single-family loans in the secondary market.
The stock's very low forward price-to-earnings ratio is related to investor discomfort over the slowing volume of mortgage lending across the industry. 2012 was a banner year for refinancing activity, spurred by record low interest rates and the Home Affordable Refinance Program, or HARP, which was expended early last year to allow qualified borrowers with loans held by
to refinance their entire balances, no matter how much the value of the collateral property had declined.
According to its
April 18 industry forecast
, the Mortgage Bankers Association expects (MBA) total U.S. one-to-four mortgage loan originations to decline to $1.478 trillion this year from $1.750 trillion in 2012. The MBA expects originations to decline further in 2014, to $1.091 trillion.
HomeStreet reported first-quarter earnings of $10.9 million, or 74 cents a share, declining from $21.5 million, or $1.46 a share, in the fourth quarter, and $19.6 million, or $1.86 a share, in the first quarter of 2012. The year-over-year earnings decline mainly reflected higher noninterest expense, "primarily due to an increase in salaries and related costs, including commissions to lending personnel, and higher general and administrative expenses, reflecting the Company's growth and increased mortgage production capacity," according to HomeStreet's earnings press release.
The bank's net gains on mortgage originations and sales during the first quarter totaled $53.9 million, declining from $68.8 million the previous quarter, but increasing from $29.5 million a year earlier. HomeStreet saw its net mortgage loan commitments decline to $1.04 billion in the first quarter from $1.25 billion in the fourth quarter, reflecting "overall decrease in regional mortgage origination activity in part due to expected seasonal weakness, as well as historically low housing inventories that constrained the purchase market."
Still, despite the mortgage decline and expense increase HomeStreet achieved a first-quarter ROA of 1.70% and a return on average tangible common equity of 27.6%, according to
Thomson Reuters Bank Insight
. Those are very strong numbers for any bank.
FBR analyst Paul Miller rates HomeStreet "outperform," with a price target of $27.50, and said in a note to clients on April 30 that "going forward, we expect that mortgage banking revenues will continue to support earnings given favorable housing starts and purchase volumes within HomeStreet's footprint, strong HARP 2.0 volumes, and the company's expanded origination platform."
Interested in more on HomeStreet? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.
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.