NEW YORK (
) -- Citigroup analyst Josh Levin on Thursday initiated or assumed his firm's coverage for 10 regional banks, with one "Buy" recommendation and two "Sell" calls.
The analyst is not enthusiastic about the group, saying that his coverage universe should trade at roughly book value, and that "given that our stocks are currently trading close to that valuation, we do not see much upside in most of our stocks at the current time."
The remarkable year-to-date bank stock rally, with the
KBW Bank Index
rising 24% year-to-date through Wednesday's close at 49.90 -- following a 25% drop during 2011 - was largely driven by bargain hunting, with so many names trading below book value at the end of last year.
Two of the largest U.S. bank holding companies are still trading at very significant discounts to book value and at attractive price multiples to forward earnings estimates, despite stellar year-to-date returns:
- Shares of Bank of America (BAC) closed at $9.20 Wednesday, returning 66% year-to-date, following a plunge of 58% 2011. The shares still trade for just 0.7 times the company's Dec. 30 tangible book value of $12.95, and for nine times the consensus 2013 EPS estimate of $1.06, among analysts polled by Thomson Reuters. The consensus first-quarter EPS estimate for BAC is 12 cents, with a full-year 2012 estimate of 69 cents.
- Citigroup (C) closed at $35.04 Wednesday, returning 33% year-to-date, following last year's 44% decline. Citi's shares are also heavily discounted, at just 0.7 times the Dec. 30 tangible book value of $49.81. The shares trade for eight times the consensus 2013 EPS estimate of $4.70. Analysts expect the company to post first-quarter EPS of 96 cents, and EPS of $4.07 for all of 2012.
Levin said that Citigroup's analysis suggested "that total loan growth on banks' balance sheets should remain anemic," but that commercial and industrial loans "have the best prospects for growth over the next one to two years."
The analyst added that "absent a rise in interest rates, regional banks are running out of tools to defend or grow their
net interest margins," and projected among the regional banks he covers, "median NIM compression of ~7 bps in '12 followed by ~7 bps of NIM expansion in '13."
Levin also addressed the continual cost-cutting chatter from bank executives with skepticism, saying "our analysis suggests that, absent shrinking the size and scope of their operations, banks do no have much room left in the way of non-credit cost reductions."
Among the regionals with neutral ratings from Citi, Levin named
of Atlanta, as "one of the first names we would look to go long on a pull back," saying that "although we do not think it has enough upside at its current valuation to warrant a Buy rating, we think STI has more upside than most other names," because of a 33% discount on a price-to-book and price-to-earnings basis when compared to its peer group."
Levin also said that SunTrust "may enjoy both upward EPS revisions and multiple expansion in the quarters ahead."
Here are the
for which Levin initiated or took over coverage with "Buy" or "Sell" ratings, starting with the "Buy:"
of Cleveland closed at $8.28 Wednesday, returning 8% year-to-date, following a 12% decline during 2011.
The shares trade for 0.9 times tangible book value, according to HighlineFI, and for 10 times the consensus 2013 earnings estimate of 81 cents a share, among analysts polled by Thomson Reuters.
The company on March 14 announced that the
had approved its plan to increase its quarterly dividend to five cents from three cents, and announced that its board of directors would "consider the potential dividend increase at its regular May meeting."
KeyCorp also announced that it had authorized "a common stock repurchase program of up to $344 million."
Based on the increased quarterly payout, the shares have a dividend yield of 2.42%.
KeyCorp is scheduled to report its first-quarter results on April 19, and Levin estimates the company will post earnings of 21 cents a share, ahead of the 19-cent consensus estimate, with a full-year EPS estimate of 70 cents for 2012, which is behind the consensus estimate of 76 cents.
Levin rates KeyCorp a "Buy," with a $10 price target, calling it "a plain vanilla valuation call," since the shares trade "at an ~15% discount to its peers on a
price-to-book-value basis," and that with strong capital, "KEY offers more downside protection than most of its peers in a market sell-off."
Levin also said that "KEY has one of the more straightforward stories in our coverage universe" being "focused on
commercial and industrial lending with an emphasis on middle market companies," and having "above average ability to defend its NIM given that it has the highest cost of interest-bearing deposits in our coverage universe."
Interested in more on KeyCorp? See TheStreet Ratings' report card for this stock.
of Dallas closed at $32.02 Wednesday, returning 25% year-to-date, following a 38% decline last year.
The shares trade for just over tangible book value, and for 12 times the consensus 2013 EPS estimate of $2.64.
Comerica on March 14 announced that the Federal Reserve had not objected to its capital plan, which provided up to $375 million in common share buybacks through the first quarter of 2013. The capital plan also included an increase of the company's quarterly dividend to 15 cents a share from 10 cents, which "will be considered by the Board at its April 24, 2012, meeting."
Based on the current 10-cent quarterly payout, Comerica's shares have a dividend yield of 1.25%.
Comerica will report its first-quarter results on April 17, with a consensus EPS estimate of 55 cents.
Levin assumed coverage of Comerica, lowering Citigroup's rating for the shares to "Sell" with a $29 price target,from a neutral rating, saying his call was "primarily valuation driven but we also believe there may be a near-term negative catalyst."
The analyst called Comerica "a well-run company with a highly talented and capable management team," adding that "Its C&I focused business model exposes it to that segment of the loan market which we believe will experience the highest growth over the next one to two years." Levin also said that the company's "conservative credit culture that served it well during the credit crisis."
But the analyst called Comerica "a bad stock at its current price," because the company "has the greatest gap in our coverage universe between what we project its equity spread (ROE minus cost of equity) will be in '12 and '13 and what the stock is pricing in at its current valuation."
Levin provided some very clear direction in his call, saying that "unless an investor is willing to make an implicit or explicit call that interest rates in the future will be meaningfully higher than what the forward curves are currently implying, we think he or she should sell CMA."
Citigroup estimates that Comercia will post first-quarter EPS of 61 cents, with full-year earnings of $2.31 a share for all of 2012, and 2013 EPS of $2.64.
Interested in more on Comerica? See TheStreet Ratings' report card for this stock.
New York Community Bancorp
New York Community Bancorp
( NYB) of Westbury, N.Y., closed at $13.90 Wednesday, returning 15% year-to-date, following a 30% drop during 2011.
The shares trade for just over twice their tangible book value and for 12.5 times the consensus 2013 EPS estimate of $1.11.
Based on a quarterly payout of 25 cents, the shares have a dividend yield of 7.19%, which is among the highest among publicly traded U.S. banks.
New York Community's ratio of dividends paid out to earnings has been quite high over the past two years, but the company has maintained the 25-cent dividend for 32 consecutive quarters.
Levin initiated Citi's coverage of New York Community Bancorp with a "Sell" rating and an $11 price target, which "is the lowest on the Street and well below the average target price of $14."
The analyst said that Citigroup believed "that it is more likely than not that bank regulators will require NYB to reduce its dividend given that (1) NYB's dividend payout ratio will likely be in excess of 95% in '12 and could exceed 100% (2) its
tangible equity to tangible assets ratio is ~7.8% and should continue to decline given that NYB is unlikely to materially grow or retain its earnings in '12 and '13 but is growing its assets."
Levin added that "although anticipating if and when a regulator might force a dividend cut is a difficult proposition, we note that in early '13 NYB's dividend policy will come under new scrutiny as Dodd-Frank will require NYB to submit its capital plan to the Fed for approval."
Citigroup estimates that NYB will post first-quarter EPS of 25 cents, with earnings of $1.05 for all of 2012, followed by 2013 EPS of $1.11.
Analysts' views on New York Community Bancorp and its lucrative dividend are widely varied.
Following the company's agreement on March 30 to purchase $2.3 billion in deposits from
Aurora Bank, FSB
, of Wilmington, Del., for a premium of $24 million, KBW analyst Fred Cannon reiterated his "Outperform" rating for New York Community Bancorp, with a price target of $15, saying "this looks like a good deal for NYB as it provides the company several viable options to grow earnings."
Interested in more on New York Community Bancorp? See TheStreet Ratings' report card for this stock.
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Written by Philip van Doorn in Jupiter, Fla.
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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.