Updated with market close information.
NEW YORK (
) -- Even with bank stocks showing a major recovery so far this year, Guggenheim Securities analyst Marty Mosby says "the earnings recovery of the Large Cap Banks actually has eclipsed the stock price rebound."
While raising his price targets for a baker's dozen bank holding company stocks, Mosby on Tuesday highlighted two major banking names with neutral ratings that could represent long-term value "if investors begin to increase their appetite for risk," and three buy-rated holding companies with "the most upside potential relative to downside risk."
"The last correction in Large Cap Bank stock prices pushed their stock prices back to below 50% of their pre-recession levels," Mosby said, "However, our current forecasts expect the earnings of our Large Cap Banks to recover approximately 80% of their pre-recession per share levels by the end of 2012."
The analyst also pointed out that several large-cap holding companies "have actually already exceeded their prerecession per share earnings levels," with significant increases in estimated 2012 pre-provision earnings -- in order to look beyond the boost to earnings from the release of loan loss reserves as credit quality improves -- from 2007 for
PNC Financial Services Group
Bank of New York Mellon
Meanwhile, despite the bank stock rally, with the
KBW Bank Index
rising 8% year-to-date and many of the best-known banking names showing much higher returns, the stock prices of some high quality banks "high quality banks have been constrained below their peak pre-recession levels as investors appear hesitant to push stock prices back above their prior peaks," according to Mosby.
The analyst suggests that investors "focus on banks that can generate strong profitability, growing
tangible book value, and can consistently increase dividend and share repurchase payouts."
Before moving on to Mosby's three featured buy-rated banks, here are the analyst's two neutral-rated value plays:
The first of Mosby's two discounted names value names is
Bank of America
, which closed at $7.13 on Tuesday, returning 28% year-to-date, after plunging 58% in 2011.
The analyst maintained his neutral rating for the shares, but increased his 12-month price target to $9.00 from $6.50. Mosby estimates that Bank of America will earn 92 cents a share in 2012, which is well ahead of the consensus estimate of 73 cents, among analysts polled by Thomson Reuters.
While the company is among the "most pressured" when considering the enhanced Basel III capital requirements and the current round of Federal Reserve
, Mosby said that neither Bank of America nor
"would need to issue incremental capital under our "Worst Case" scenario, since both would be able to satisfy Basel III requirements well before the 2019 requirement."
While Mosby's price target implies another 27% upside for Bank of America's shares from Monday's close, the analyst says the company will still be dealing with its legacy mortgage overhang from its Countrywide Financial and Merrill Lynch acquisitions. Then again, Mosby says "if this economic recovery's momentum reaccelerates, then we expect BAC's valuation would move somewhere between its current potential of $8 and current tangible book value of $13."
Bank of America's shares trade for 0.6 times tangible book value, according to HighlineFI, and for just under 10 times the consensus 2012 earnings estimate of 73 cents.
Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.
Mosby reiterated his neutral rating on Regions Financial, but increased his price target for the Birmingham, Ala., lender to $6.00 from $4.00.
Regions Financial's shares returned 21% year-to-date through Tuesday's closing price of 5.22, after giving up 38% in 2011. The company is among the more volatile bank stocks, reflecting in part the long negotiations leading to the agreement to sell its Morgan Keegan brokerage subsidiary to Raymond James Financial for "total consideration of $1.18 billion."
The volatility in the shares also reflects the overhang from $3.5 billion in federal bailout funds the company owes for assistance received in 2008 through the Troubled Assets Relief Program or TARP.
Mosby estimates that Regions will earn 83 cents a share in 2012, which is well ahead of the consensus estimate. The analyst expects "RF's return to normalized earnings power to be gradual, as short-term rates need to rise to get net interest margin significantly above current levels, elevated credit-related operating expenses could take longer to be eliminated, and increased share count could dilute earnings further as TARP is repaid."
The basis for Mosby's price target for Regions is a "return to tangible book value by the end of 2012."
The shares trade for 0.85 times tangible book value and for 11 times the consensus 2012 EPS estimate of 47 cents.
Interested in more on Regions Financial? See TheStreet Ratings' report card for this stock.
Mosby reiterated his "Buy" rating for Wells Fargo, with a price target of $37.00.
The shares closed at $29.21 Tuesday, rising 6% year-to-date, after a 10% decline in 2011.
According to data supplied by HighlineFI, Wells Fargo has had, by far, the strongest and most consistent earnings performance among the "big four" U.S. bank holding companies, with a return on average assets (ROA) ranging between 1.11% and 1.27% over the past five quarters.
Mosby estimates the company will earn $3.40 a share in 2012, which is slightly above the consensus estimate.
Wells Fargo's shares trade for 1.7 times tangible book value and nine times the consensus 2012 EPS estimate of $3.20.
Mosby said that given the company's "strong earnings growth, we believe that WFC deserves the premium valuations it currently trades at," adding that the stress test results will highlight the company's "trong capital position and profitability as they are able to increase their dividend by 50%, resulting in a payout ratio around 30% and a dividend yield above 3%."
Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.
Mosby reiterated his "Buy" rating for U.S Bancorp, while raising his price target for the shares to $37.00 from $30.50.
The shares closed at $28.22 Tuesday, rising 4% year-to-date, after returning 2% in 2011.
Mosby estimates the Minneapolis lender will earn $2.89 a share in 2013, and is once again, ahead of the consensus.
While Wells Fargo has been the best earner among the "big four," U.S. Bancorp has been the gold standard among large regional holding companies, with an ROA ranging between 1.36% and 1.61% over the past five quarters.
For U.S. Bancorp, "strong loan growth combined with an industry-leading risk management track record produces low-risk earnings growth," which "warrants the premium valuation it now trades at," according to Mosby. The analyst also believes the stress test results "further display USB's relative strength and allow management to push up the dividend payout by more than 50%, resulting in close to a 3% dividend yield on current prices.
USB trades for 2.6 times tangible book value and 10.5 times the consensus 2012 EPS estimate of $2.68.
Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.
Mosby reiterated his "Buy" rating on Bank of New York Mellon, while raising his price target for the shares to $28.00 from $25.00
The shares closed at $20.13 Tuesday, returning 2% year-to-date, after a decline of 33% in 2011.
Mosby estimates that Bank of New York Mellon will earn $2.35 a share in 2012, which is slightly ahead of the consensus.
Mosby says that the company's inability to grow earnings in a hostile environment has "pushed BK's price to earnings ratio to historically low levels at 9x 2012E earnings per share," and that although "the market is focused on current performance, we continue to believe that BK's earnings growth should return in 2012."
Mosby expects that "efficiency initiatives, a stable net interest margin, an acceleration in share repurchases, and a return of investor confidence
will help produce at least 10% EPS growth in 2012, pushing BK's P/E back above 10x and creating more than 15% potential upside to BK's current stock price."
Following the stress tests, Bank of New York Mellon "could increase their payout to 30%," with a dividend yield approaching 3%, according to the analyst.
Bank of New York Mellon trades for 2.2 times tangible book value and for nine times the consensus 2012 EPS estimate of $2.23.
Interested in more on Bank of New York Mellon? See TheStreet Ratings' report card for this stock.
>>To see these stocks in action, visit the
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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.