NEW YORK (
) -- 2012 has been an amazing year for large-cap bank stocks, but investors might find greater safety and growth opportunities in a select group smaller names during 2013, according to Credit Suisse analyst Matthew Clark.
Playing the large-cap banking names that underperformed in 2011 has certainly been a winning strategy during 2012:
- Shares of Bank of America (BAC) - Get Report were up a whopping 102% year-to-date though Wednesday's close at $11.19 following a 58% drop during 2011. The shares were still down 15% since the end of 2010. The shares trade for 0.8 times their reported Sept. 30 tangible book value of $13.48. Despite the continued discount to book, the shares look pricey in the current environment for large-cap bank stocks, trading for 11.6 times the consensus 2013 EPS estimate of 96 cents, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.25, as analysts expect CEO Brian Moynihan's "Project New BAC" expense cutting program to bear fruit, while credit quality continues to improve. Bank of America also looks to be a capital return story in 2013 following the next round of Federal Reserve stress tests, since the company met its fully phased-in Basel III Tier 1 common equity ratio requirement of 9.0% as of Sept. 30.
- Citigroup (C) - Get Report was up 50% year-to-date through Wednesday's close at $39.45, following a 44% decline during 2011. The shares trade for 0.8 times their reported Sept. 30 tangible book value of $52.70, but are considerably cheaper than Bank of America on a forward P/E basis, at 8.5 times the consensus 2013 EPS estimate of $4.65. The consensus 2014 EPS estimate is $5.13. Citi is also looking to capitalize on expense savings and reward faithful investors with a significant return of capital in 2013, through an increase in the dividend on common shares, as well as buybacks.
- Shares of Regions Financial (RF) - Get Report of Birmingham ,Ala., were up 65% year-to-date through Wednesday's close at $7.05, following a 38% decline in 2011. The shares trade for 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for 9.2 times the consensus 2013 EPS estimate of 77 cents. The consensus 2014 EPS estimate is 82 cents. It's been a year of transition for Regions, with the company with the sale of its Morgan Keegan subsidiary in the first quarter, followed by a common equity raise and the company's second-quarter redemption of preferred shares held by the government for assistance received during 2008 through the Troubled Assets Relief Program, or TARP. Credit Suisse analyst Craig Siegenthaler in November estimated that following the stress tests Regions will be approved to raise its quarterly dividend from a penny to four cents, and to buy back $249 million worth of shares during 2013.
- SunTrust (STI) - Get Report of Atlanta was up 63% through Wednesday's close at $28.56, following a 40% decline during 2011. The shares trade for 1.1 times tangible book value, and for 10.5 times the consensus 2013 EPS estimate of $2.72. The consensus 2014 EPS estimate is $3.01. SunTrust during the third quarter made several moves to shore up its balance sheet and capital ahead of the stress tests, including the sale of its stake of Coca-Cola (KO) - Get Report, resulting in a pre-tax gain of $1.9 billion. Bank of America Merrill Lynch analyst Erika Penala on Nov. 26 estimated that SunTrust in March would be approved to increase its quarterly dividend from a nickel a share to 15 cents, while also repurchasing $565 million in common shares during 2013.
While most of the largest U.S. banks seemed primed for significant increases in dividends on common shares and/or buybacks during 2013, this may already be baked into the share prices. The industry is also facing continued pressure on
, with the Federal Reserve last week saying it would continue its "
" policies to keep short-term and long-term interest rates at historically low levels "at least as long as the unemployment rate remains above 6-1/2 percent." The large banks will be looking for the mortgage refinancing wave to make up for the lost interest income.
Small banks of course face the same margin pressures as their large competitors, but Clark on Wednesday said "we continue to believe a premium valuation is appropriate for the SMID-cap banks based on takeout potential, stronger growth prospects, fewer one-time charges, less regulatory scrutiny, and lack of direct exposure to the Eurozone."
The analyst said he was favoring "niche growth lenders where outsized market share opportunities persist and select situations where earnings levers still exist."
Here are the five small and midcap bank stocks that Clark rates "Outperform," ranked by ascending upside potential, based on his price targets:
5. Signature Bank
of New York closed at $71.55 Wednesday, returning 19% year-to-date, following a 7% decline last year.
The shares trade for 2.1 times tangible book value, according to Thomson Reuters Bank Insight, and for 16.6 times the consensus 2013 earnings estimate of $4.30 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $4.72.
Signature Bank had total assets of $16.5 billion as of Sept. 30. The bank reported very strong loan growth of 9% in the third quarter, to $8.8 billion as of Sept. 30, with loans growing by 28% from a year earlier.
Earnings have been consistent, with operating returns on average assets ranging from 1.13% to 1.23% over the past five quarters, according to Thomson Reuters Bank Insight. The company earned $47.7 million, or a dollar a share, during the third quarter, increasing from $45.3 million, or 96 cents a share, in the second quarter, and $38.4 million, or 83 cents a share, in the third quarter of 2011.
The bank's net interest margin widened to 3.56%, from 3.54% the previous quarter, and 3.51% a year earlier, however, the bank said in its third-quarter earnings release that excluding loan prepayment income, the margin "decreased 3 Basis Points to 3.41 Percent, compared with 3.44 Percent for the 2012 second quarter."
Clark's price target for Signature Bank is $82, and the analyst expects the company to maintain its organic growth strategy with a 2013 EPS estimate of $4.40, increasing to $4.90 in 2014.
Interested in more on Signature Bank? See TheStreet Ratings' report card for this stock.
4. Susquehanna Bancshares
of Lititz, Pa., closed at $10.51 Wednesday, returning 28% year-to-date, following a 13% decline during 2011.
The shares trade for 1.5 times tangible book value, and for 11.3 times the consensus 2013 EPS estimate of 93 cents. The consensus 2014 EPS estimate is 97 cents.
Based on a seven-cent quarterly payout, the shares have a dividend yield of 2.66%. Susquehanna Bancshares on Dec. 11 announced it would accelerate the payment of its first-quarter 2013 dividend to Dec. 31 for shareholders of record as of Dec. 21. CEO William Reuter said the company moved up the payment "due to the potential for change in tax rates that would apply to dividends in 2013."
Unless President Obama and the Republican leadership of the House of Representatives hammer out a new budget deal, the Fiscal Cliff will include the expiration of the maximum 15% federal tax rate on qualified dividend income, which enacted when George W. Bush was president and extended by President Obama. Dividends will then be taxed as ordinary income.
Susquehanna Bancshares had $16.5 billion in total assets as of Sept. 30. The company in February acquired Tower Bancorp, adding roughly $2.5 billion in total assets, including $2.1 billion in loans.
The company reported third-quarter earnings of $36.7 million, or 20 cents a share, down slightly from $37.8 million, or 20 cents a share, the previous quarter, but increasing from $15.0 million, or 12 cents a share, a year earlier, reflecting an increase in net interest income from the acquisition of Tower Bancorp and Abington Bancorp in October 2011, and also a decline credit costs. Susquehanna's third-quarter provision for loan and lease losses during the third quarter was $16 million, which was the same amount added to reserves in the second quarter, but was down from $25 million in the third quarter of 2011.
Susquehanna also reported strong organic commercial loan growth of 3.2% during the third quarter. The company's third-quarter net interest margin was 3.92%, declining from 4.10% in the second quarter, "principally from the impact of purchase accounting" from the Tower acquisition, however, the margin was up from 3.58% in the third quarter of 2011.
Clark's price target for Susquehanna is $12 and the analyst estimates the company will earn 95 cents a share in 2013, with EPS increasing to $1.05 in 2014. The analyst said that Credit Suisse was "more positive on SUSQ based on our (1) increased comfort in consensus estimates, (2) view that bank deals are less likely and, (3) expectation for longer-term goals to be raised."
Interested in more on Susquehanna Bancshares? See TheStreet Ratings' report card for this stock.
3. East West Bancorp
East West Bancorp
of Los Angeles closed at $21.62 Wednesday, returning 12% year-to-date, following a 2% return during 2011.
The shares trade for 1.7 times tangible book value, and for 10.8 times the consensus 2013 earnings estimate of two dollars a share. The consensus 2014 EPS estimate is $2.09.
Based on a quarterly payout of 10 cents, the shares have a dividend yield of 1.85%. The company repurchased $50 million worth of common shares during the second quarter.
The company had $4.0 billion in total assets as of Sept. 30. Earnings have been good, with operating ROA improving to 1.31% from 1.14% over the past five quarters. East West Bancorp reported third-quarter earnings available to common shareholders of $69.4 million, or 48 cents a share, increasing from $68.8 million, or 47 cents a share, in the second quarter, and from $60.7 million, or 41 cents a share, in the third quarter of 2011.
Total loans grew by 2% year-over-year, to $14.5 billion as of Sept. 30, however, non-real estate commercial loans were up 9 sequentially and 24% year-over-year, to $3.7 billion. The company's net interest margin -- adjusted to exclude "the net impact to interest income of $25.6 million resulting from covered loan activity and amortization of
its FDIC indemnification asset" -- was 3.95% during the third quarter, holding up well in the low-rate environment, as it narrowed from 4.01% the previous quarter and 3.98% a year earlier.
The company provided fourth-quarter guidance, including EPS ranging from 47 to 49 cents, with the margin declining further, to 3.90%.
Clark's price target for East West Bancorp is $26, and he estimates the company will earn $2.05 a share in 2013, with EPS increasing to $2.26 in 2014.
Interested in more on East West Bancorp? See TheStreet Ratings' report card for this stock.
2. First Republic Bank
First Republic Bank
of San Francisco closed at $33.31 Wednesday, returning 10% year-to-date, following a 5% return during 2011.
The shares trade for 1.6 times tangible book value, and for 11.2 times the consensus 2013 EPS estimate of $2.97. The consensus 2014 EPS estimate is also $2.97.
Based on a quarterly payout of 10 cents, the shares have a dividend yield of 1.20%. First Republic also accelerated the payment of its fourth quarter dividend in order to avoid a possibly higher tax rate next year. The fourth-quarter dividend will be paid on Dec. 28 to shareholders of record as of Dec. 17.
After being acquired by Bank of America (as part of that company's purchase of Merrill Lynch in January 2009, First Republic was sold in July 2010 for $1.86 billion to an investor group that included Colony Financial and General Atlantic LLC, and was led by First Republic's original management team. First Republic completed a public offering of common shares in December of 2010.
First Republic is among the small and mid-cap banks covered by Credit Suisse that Clark thinks "could potentially sell in the next 12-18 months."
First Republic Bank had $32.6 billion in assets as of Sept. 30, with offices in California, Oregon, Connecticut, Massachusetts and New York, focusing on private banking and jumbo mortgage lending. The bank in November agreed to acquire Luminous Capital of Los Angeles, for undisclosed terms.
Luminous Capital is an investment advisor with $5.5 billion in assets under management. First Republic said that "the six partners of the firm will sign long-term employment contracts as part of the transaction," which is expected to close by the end of the year.
The bank's total loans grew by 27% year-over-year, to $26.3 billion as of Sept. 30.
Third-quarter earnings available to common stockholders were $97.0 million, or 72 cents a share, increasing from $87.8 million, or 66 cents a share, in the third quarter of 2011. The company said that "excluding the impact of purchase accounting, net income for the third quarter of 2012 was $78.7 million, up 43% from last year's third quarter," and that "on this non-GAAP basis, the third quarter diluted EPS were $0.54, up 29% year over year."
Third-quarter net interest income was $298.8 million, increasing 3% sequentially, and 11% year-over-year. Excluding accretion and amortization of fair value adjustments recorded in purchase accounting, the third-quarter net interest margin was 3.47%, expanding from 3.41% the previous quarter, but narrowing from 3.49% a year earlier.
Clark's price target for First Republic is $42, and he estimates the bank will earn three dollars a share in 2013, with EPS increasing to $3.10 in 2014.
Interested in more on First Republic Bank? See TheStreet Ratings' report card for this stock.
1. Columbia Banking System
Columbia Banking System
of Tacoma, Wash., closed at $17.65 Wednesday, down 4% year-to-date, following a 7% decline during 2011.
The shares trade for 1.1 times tangible book value, and for 13.07 times the consensus 2013 EPS estimate of $1.35. The consensus 2014 EPS estimate is $1.70.
Based on a regular quarterly payout of nine cents, the shares have a dividend yield of 2.04%.
The company in September announced an agreement to acquire
West Coast Bancorp
( WCBO) of Lake Oswego, Ore., for about $506 million in cash and stock. West Coast Bancorp had $2.5 billion in total assets as of Sept. 30. The deal is expected to be completed during the first quarter of 2013. Prior to the merger announcement, the company paid additional special dividends for four quarters, in order to avoid building additional excess capital.
Columbia Banking System had $4.9 billion in total assets as of Sept. 30 and reported third-quarter earnings of $11.9 million, or 30 cents a share, matching the second-quarter bottom line, but declining from $18.9 million, or, 48 cents a share, during the third quarter of 2011. The year-over-year earnings decline "was due to the enhanced benefits realized in the third quarter of 2011 from Columbia's FDIC-assisted transactions," according to the company.
The company's third-quarter net interest margin, "incremental accretion income," was an impressive $4.40% in the third quarter, although it narrowed from 4.44% the previous quarter, and 4.59% a year earlier. Clark on Wednesday lowered his 2013 EPS estimate for the company to $1.53 from $1.75 and lowered his 2014 estimate to $1.61 from $1.80, "cash position for its pending WCBO deal that is likely to put 20-25 bps of pressure on the margin, only part of which it may recapture after the deal closes."
The analyst's price target for Columbia Banking System is $22.00.
Interested in more on Columbia Banking System? 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.