NEW YORK (
) -- Deutsche Bank analyst Matt O'Connor on Friday summarized fourth-quarter results for 15 large-cap banks by suggesting that investors stick with bank stocks with the most leverage to macroeconomic themes.
"Overall, 4Q bank results were largely in line with expectations," O'Connor said, saying that at this point in the banking industry's recovery, "is to remain selective overall. We prefer stocks with leverage to macro themes--such as slowing consumer deleveraging, housing improvement, and growth in consumer spending."
With the Federal Reserve keeping its target range for the short-term federal funds rate in a range of zero to 0.25% since late 2008, a major industry theme has been the narrowing of
(NIM). The margin is the spread between the average yield on loans and securities investments, and the average cost for deposits and borrowings. O'Connor said that among the 15 large-cap, nine reported sequential narrowing of net interest margins, although "NIM pressure from lower yields on both loans and securities was partially offset by additional benefits from lower funding costs (including the calling of TruPs, runoff of higher cost deposits, and debt reduction)," and other factors.
Despite the narrowing margins, the group managed to grow its net interest income slightly during the fourth quarter, driven by a 1.2% quarter-over-quarter increase in average loans, along with "market-based
net interest income for the money centers," including
Bank of America
, according to O'Connor.
Capital markets results for the fourth quarter were "better than expected," according to O'Connor, declining 10% on average from the third quarter (excluding the distortion of debit and credit valuation adjustments), but rising between 25% and 30% from a year earlier. "Ibanking fees were strong across the board (+20% q/q and 56% y/y on average), driven by stronger fees across all categories."
The analyst said that "mortgage results were strong and will remain so" although he added that "while some expenses will come out when revenues eventually decline, we believe expense declines represent just 20-30% of the decline in production revenue (given gain on sale spreads likely come in, along with volumes)."
A continuing theme for many large over the past few years has been the earnings benefit from the release of loan loss reserves that were built up at the height of the credit crisis. O'Connor said that "credit costs have reached normalized levels for many, and banks with meaningful loan growth could actually report higher provisions later this year and into 2014," which will have an effect on earnings.
to a "Hold" rating from a "Buy" rating, saying that the shares were up 50% since August, and that although the shares had lagged
Bank of America
"a bit," they had outperformed
"by 1600 bps."
of available to common shareholders of $2.833 billion, or $5.60 a share, increasing from $1.458 billion, or $2.85 a share in the third quarter, and $978 million, or $1.84 a share, in the fourth quarter of 2011, with large increases in both debt and equity underwriting revenue; continued strength in institutional client servicing revenue, which was up 4% sequentially and 42% year-over-year to $4.342 billion; and increases of 9% sequentially and 126% year-over-year in investing and lending revenue, to $1.973 billion.
O'Connor raised his 2012 earnings estimate for Goldman Sachs to $13.24 from $12.26 and raised his 2014 EPS estimate to $14.40 from $14.00 and said that the stock was now trading "in line" with his 2013 earnings estimate and "a 15-20% premium" to his estimates for 2014 and 2015. He added that "GS also trades at a 15-20% premium on tangible book vs. peers," and that "one could argue both more regulatory uncertainty on earnings (see below) and less of a cost savings story from here."
The following are the five large-cap bank stocks with "Buy" recommendations from O'Connor, ranked by descending forward ratios of price to consensus 2014 earnings estimates:
5. U.S. Bancorp
of Minneapolis closed at $33.11 Thursday, trading for 2.4 times tangible book value, according to Thomson Reuters Bank Insight, and for 10 times the consensus 2014 earnings estimate of $3.30 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $3.08.
Based on a quarterly payout of 19.5 cents, the shares have a dividend yield of 2.40%.
Early in January, U.S. Bancorp was featured by
posting the best returns on average tangible common equity from the beginning of 2010 through the third quarter of 2011.
The company reported fourth-quarter net income of $1.420 billion, or 72 cents a share, declining from $1.474 billion, or 74 cents a share, in the third quarter, but increasing from $1.350 billion, or 69 cents a share, in the fourth quarter of 2011. The fourth-quarter results included $80 million in expenses tied to the $8.5 billion mortgage
between federal regulators and the largest loan servicers.
USB's fourth-quarter return on average assets (ROA) was 1.62%, declining from 1.70% the previous quarter but matching the ROA a year earlier. The fourth-quarter return on average common equity was 15.6%, declining from 16.5% in the third quarter and 16.8% in the fourth quarter of 2011. Please see
for much more detail on the company's results.
O'Connor's price target for U.S. Bancorp's shares is $38, and he estimates the company will earn $3.06 a share this year, with earnings increasing to $3.30 a share in 2014. The analyst includes USB among his two "top picks" for the banking sector, and said on Thursday that "USB now trades in line with peers on our 2013/2014 EPS and at a discount on our 2015E despite above average growth, higher ROA/ROEs and less risk in our view."
O'Connor also said that over the long-term, "USB should be the biggest beneficiaries of GSE reform among large banks and is well positioned for a pickup in consumer and commercial spending (payments represent 15-20% of revenue)."
Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.
4. Fifth Third Bancorp
Fifth Third Bancorp
of Cincinnati closed at $16.39 Thursday, trading for 1.3 times tangible book value, and for 9.8 times the consensus 2014 EPS estimate of $1.68. The consensus 2013 EPS estimate is $1.63.
Based on a quarterly payout of 10 cents, the shares have a dividend yield of 2.44%.
Fifth Third reported fourth-quarter net earnings available to common shareholders of $390 million, or 43 cents a share, increasing from $354 million, or 38 cents a share in the third quarter, and $305 million, or 33 cents a share, in the fourth quarter of 2011. The fourth-quarter results included a number of one-time items, and the company continued to increase its mortgage banking revenue.
The company's fourth-quarter ROA was 1.33%, improving from 1.23% in the third quarter and 1.08% in the fourth quarter of 2011. The return on tangible common equity during the fourth quarter was 14.1%, increasing from 12.8% the previous quarter and 11.9% a year earlier. Please see
for more detail on Fifth Third's fourth-quarter results.
O'Connor's price target for Fifth-Third's shares is $17, and he estimates the company will earn $1.70 a share in 2013, with EPS increasing slightly to $1.71 in 2014. The analyst said that "since reporting better than expected 4Q results/2013 outlook, the stock has outperformed the group by 500bps. However, FITB still trades at a 5-10% discount on our 2013-2015E, despite higher returns" than peers.
Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.
3. PNC Financial Services Group
PNC Financial Services Group
closed at $61.86 Thursday, trading for 0.9 times tangible book value, and for nine times the consensus 2014 EPS estimate of $6.84. The consensus 2013 EPS estimate is $6.54.
PNC pays a quarterly dividend of 40 cents, for a yield of 2.59%.
The company fourth-quarter earnings of $719 million, or $1.24 a share, compared to earnings of $925 million, or $1.64 a share, in the third quarter, and $493 million, or 85 cents a share, in the fourth quarter of 2012.
Like many of the large-cap banks, PNC reported a number of one-time items, including a preannounced $91 million in expenses related to mortgage foreclosures, which included $70 million for the industry settlement. Other items included "a pretax provision of $254 million for residential mortgage repurchase obligations related to expected elevated levels of repurchase demands primarily as a result of further changes in behavior and demand patterns" of Fannie Mae and Freddie Mac," as well as "a $45 million goodwill impairment charge for the company's mortgage unit, and a gain of $130 million on the sale of
." Together, the items lowered PNC's fourth-quarter earnings by 47 cents a share.
Another major item affecting the fourth-quarter earnings was a $318 million provision for credit losses, increasing from $228 million the previous quarter, and $190 million in the fourth quarter of 2011. CFO Rick Johnson said during the company's conference call that the provision "higher than the previous guidance of $150 million to $250 million, primarily due to the completion of our implementation of regulatory guidance for loans discharged from bankruptcy. A provision of $53 million was recorded in the fourth quarter related to this guidance."
O'Connor's price target for PNC's shares is $71, and he estimates the company will earn $6.52 a share in 2013, with EPS increasing slightly to $6.54 in 2014. The analyst said that "PNC stock was a meaningful underperformer in 2012 (up only 1% vs. +22% for the S&P Commercial Bank Index) and hasn't closed the performance gap much so far this year (+7% vs. +4%, respectively)," but that the shares are trading at a discount to peers, and "with the recent appreciation in BLK stock (+33% since 9/30), PNC's stake now represents $2-3 per PNC share--something we don't think is being fully appreciated by the market."
PNC said it will disclose more detail on its stake in
when it files its annual report. The company reported that as of Sept. 30, it had a 22% economic interest in BlackRock, that its shares in BlackRock had a carrying value of $5.5 billion and a market value of $6.4 billion.
Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.
Shares of Citigroup closed at $42.80 Thursday, trading for 0.8 times tangible book value, and for 8.2 times the consensus 2014 EPS estimate of $5.19. The consensus 2013 EPS estimate is $4.60.
Citigroup is one of O'Connor's "top picks" among large-cap banks, along with U.S. Bancorp. O'Connor's price target for the shares is $46, and he estimates the company will earn $4.50 a share in 2013, with EPS rising to $5.15 in 2014.
The analyst wrote on Thursday that although "capital markets revenues were a bit light
during the fourth quarter, C was the biggest share gainer in the overall global capital markets fee pool YTD 9/30 (among the 12 largest global ibanks)."O'Connor said he remained "positive" that Citigroup would continue to benefit from the reduction in excess liquidity, as well as the "reserve release still to come (including $8-9b of mortgage reserves)," additional annual cost savings of $2 billion to $4 billion in addition to the major
announced in December, "leverage to an improving U.S. housing market," and a continued build of capital.
"The stock also trades at the lowest valuation of the banks we cover on both tangible book (at 0.8x) and EPS (9x 2013E, 8x 2014E, 7x 2015E)," he said.
Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.
1. JPMorgan Chase
Shares of JPMorgan Chase closed at $46.37 Thursday, trading for 1.2 times tangible book value, and for 8.1 times the consensus 2014 EPS estimate of $5.74. The consensus 2013 EPS estimate is $5.34.
Based on a quarterly payout of 30 cents, the shares have a dividend yield of 2.59%.
O'Connor on Friday upgraded JPMorgan to a "Buy" rating from a "Hold" rating, while raising his price target for the shares to $53 from $48, saying the shares had "risen 32% since Aug 2 vs. +62% for the other four market sensitive banks on average," and that the shares "now trade at a discount to other US market sensitive banks on 2013E and in line on our 2014E and 2015E."
The analyst expects JPMorgan Chase to announce plans to cut annual costs in a range of $3 billion to $5 billion, at the company's investor conference on Feb. 26, and that half the cost savings "will likely be incremental to what's already been disclosed," and include "declines in the cost to service mortgages not owned by JPM (worth $1.5-2b annually over the next 2-3 years), as well as costs associated with mortgages on balance sheet (another $0.5-0.7b opportunity)."
"Longer term, we expect JPM to be the best-positioned market sensitive bank for a pickup in consumer loan growth (which we expect to occur by the end of this year as private sector deleveraging comes to an end)."
O'Connor estimates that JPMorgan Chase will earn $5.30 a share in 2013, with EPS increasing to $5.83 in 2014.
Interested in more on JPMorgan Chase? 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.