(Updated with closing stock prices.)
NEW YORK (
Investors have been waiting for bank stocks to start showing some sign of life and might be tempted to now jump in to buy into the sector.
But given the unknowns that continue to weigh on the sector, from Europe to the economy, prudent investors may want to use this rally to sell the underperformers and buy stocks that are actually poised to ride the upside.
Bank stocks are leading the rally in the market, which means bullish analysts who have been consistently proved wrong over the last two years or so, might finally be starting to feel better.
But analysts still seem to be fairly selective in their buy ratings. Most favor the big banks such as
Bank of America
because of their attractive valuations.
Bank of America still trades at 0.63 times its tangible book value, although it looks more expensive on a price-to-earnings multiple of 11.4 times, based on consensus estimates of 72 cents per share.
Shares of Bank of America are already up 48% year to date. Bank analysts remain positive about its prospects going by the number of buy recommendations on the stock.
Only one analyst rates it an underperform, according to
. Still, at least two analysts have downgraded the stock from a buy to a hold in recent weeks. Keith Horowitz at Citigroup on Tuesday lowered his rating on Bank of America to "neutral", saying that further upside would be possible only after the bank has proved its earnings power.
Last week, Charles Peabody at Portales Partners also lowered his rating on the stock to hold.
So which stocks should investors weed out from their portfolio?
came up with a shortlist of bank stocks that analysts are least bullish or you might say increasingly bearish on.
We looked at actively traded bank stocks (those with an average 3- month volume of more than 50,000) that have more than 5 analysts covering them and then shortlisted those that have the most sell ratings on the stock, using
We also focused on those stocks that have a consensus recommendation of less than or equal to 3. Bloomberg assigns a consensus recommendation of 1 to 5 to stocks, with 1 indicating that it has the worst rating and 5 indicating that it has the best rating.
Interestingly, the shortlist of stocks are not necessarily the worst banks on fundamentals. In fact, a few of them rate high on profitability metrics, but appear to be fully priced with little room for upside. Analysts tend to be cautious on these stocks because the risk of downside surprises is more.
Companies with earnings disappointments in the recent quarter have also been downgraded by analysts.
, ranked by the number of sell ratings in ascending order.
5. Trustmark Corp
of Jackson, Miss., is flat year-to-date , and is down about 2% over a one-year basis.
The company had $9.7 billion in total assets as of Dec. 31.
Trustmark reported fourth-quarter net income of $24.3 million, or 38 cents a share, declining from $27.0 million, or 42 cents a share, in the third quarter, and $25.2 million, or 39 cents a share, in the fourth quarter of 2010.
The fourth-quarter earnings decline mainly resulted from a $4.2 million write-down on loans that were covered by FDIC loss-sharing agreements, "as a result of loan payoffs and improved cash flow projections and lower loss expectations for loan pools." The loans were acquired when the company purchased the failed Heritage Banking Group of Carthage, Miss., in April of last year.
Trustmark's fourth-quarter ROA was 1.01% according to SNL, and the ROA has ranged as high as 1.31% over the past five quarters.
Based on a quarterly payout of 23 cents, the shares have a dividend yield of 3.8%.
Despite these relatively positive metrics, the stock saw a wave of downgrades following its results.
Morgan Keegan analyst Ebrahim Poonwala downgraded Trustmark to a "Market Perform" rating from "Outperform," saying the stock's "near term upside is likely to be limited given the macro challenges that TRMK and the banking industry face."
Poonwala lowered his 2012 EPS estimate to $1.57 from $1.60 and his 2013 estimate to $1.66 from $1.70, "with the downward revisions driven by lower fee revenues and higher overhead costs." The analyst said that although the company is "well positioned to benefit from an ongoing US economic recovery," revenue and earnings growth would be challenging, "absent a material pick-up in industry-wide loan growth and a higher interest rate environment."
KBW analyst Brian Klock also downgraded Trustmark -- to "Underperform" from "Market Perform" -- because "the core earnings power has weakened and could remain pressured this year, which should lead to
price multiple contraction," and also because the company's "shares are already fully valued trading at a 13% 2013 P/E premium to peers and 21% premium to all US regionals."
3 out of 11 analysts rate the stock a sell or underperform, according to Bloomberg data. One analyst rates the stock a buy, while the remaining have a neutral rating.
The consensus price target is $23.40. Shares closed at $23.89 on Tuesday.
4. Bank of Hawaii
Shares of Honolulu-based
Bank of Hawaii
are up 4% year-to-date, though still lower by 3% on a one-year basis.
Bank of Hawaii had $13.846 billion in total assets as of Dec.31.
The bank reported fourth-quarter net income of $39.2 million, or 85 cents a share, declining from $43.3 million, or 92 cents a share, in the third quarter, and $40.6 million, or 84 cents a share, in the fourth quarter of 2010.
The return on assets in the fourth quarter was 1.17%. Based on a quarterly payout of 45 cents per share, the stock trades at a dividend yield of 3.89%.
Bank of Hawaii trades at a premium to many other large banks. The shares traded at more than twice its book value for over 14 times the consensus 2012 EPS estimate of $3.20, among analysts polled by FactSet.
Out of 15 analysts covering the stock, only 3 rate it a buy. Nine analysts have a neutral outlook for the stock, while 3 rate it a sell.
The consensus price target according to Bloomberg is $46. Shares closed at $46.46 Tuesday.
3. Cullen/ Frost Bankers
Shares of San Antonio, Texas- based
have gained nearly 7% year to date and is off by 5% over a one-year period.
Cullen/Frost had total assets worth $20.317 billion as of Dec. 31.
The bank reported a fourth-quarter net income of $55.4 million or 90 cents per share compared to $53.1 million or 87 cents per share in the fourth quarter of 2010. Fourth quarter return on average assets was 1.12%.
While the bank ranks high on profitability metrics and has been a consistent performer among the regionals, the stock trades at nearly two times its tangible book, making it among the more expensive bank stocks.
"We believe the company will continue to perform well fundamentally, with a credit and growth profile that is superior to peers. That said, given the higher relative valuation, we believe Cullen/Frost will have a difficult time outperforming the peer group," RBC Capital analysts wrote in a report.
Out of 19 analysts covering the stock, only one analyst has a buy rating on the stock. 14 have a neutral rating while four analysts have a sell or underperform rating on the stock.
The stock has a consensus price target if $54.42, which is below Tuesday's closing price of $56.26.
2. Hudson City Bancorp
Hudson City Bancorp
have gained 11% in 2012, though over a one-year period, shares are still down nearly 40%.
The Paramus, New Jersey-based bank had total assets of $50.85 billion.
Hudson City reported a fourth-quarter net loss of $360.5 million, or 73 cents a share, springing from its
second major balance sheet restructuring.
The company had been forced by the Office of Thrift Supervision during the first quarter to reverse its long-term leverage strategy of boosting wholesale borrowings and investing in securities, which had led to a declining net interest margin, which is the difference between a bank's average yield on loans and investments and its average cost for deposits and borrowings.
Guggenheim Securties analyst David Darst speculates that Hudson City might make a good takeover candidate for
New York City Bancorp
( NYB). "A merger between New York Community and Hudson City could be a logical combination that occurs over the next year as HCBK faces strategic challenges that are not easily cured," he said.
Darst added that once Hudson City is finished restructuring its balance sheet, the company may not have the ability to resume growth due to a constrained market for jumbo mortgages and that as this materializes, "shareholders may become more vocal for a change."
2 analysts have a buy rating on the stock. 15 analysts have a hold rating while 4 analysts have a sell or underperform rating.
The consensus price target of $6.84 is just below Tuesday's closing price of $6.97.
1. Astoria Financial
Shares of Lake Success, New York-based
are off by 2% in 2012 and have shed 44% on a one-year basis.
The bank missed expectations in the fourth quarter, reporting a net income of $11.8 million, or 12 cents per share, a 50% decline from a profit of $23.8 million, or 25 cents per share, last year.
Analysts on average had expected the company to earn 14 cents a share, according to
The company said it will freeze salaries for its executive officers to put a lid on expenses and is reviewing staffing and compensation plans.
The company said it expects multi-family/CRE loan originations of about $1.5 billion and residential loan originations for portfolio of about $3.5 billion in 2012, which will be reflected in loan growth in the first quarter.
"These actions will help, but the prolonged low-rate environment is a significant challenge," FBR Capital analyst Bob Ramsey said in a report. Ramsey has a market perform rating on the stock and a price target of $9.
Two analysts rate the stock a buy, while 10 have a hold rating and 5 analysts rate the stock a sell. The consensus price target is $8.74.
Shares closed at$8.22 on Tuesday.
>>To see these stocks in action, visit the
portfolio on Stockpickr.
--Written by Shanthi Bharatwaj in New York
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