NEW YORK (
) -- FBR analyst Paul Miller on Monday said he was "taking a more neutral stance on the industry" following last week's dismal showing for bank stocks, but also recommended seven defensive financial stocks for investors.
Amid a slew of tepid economic reports last week, continuing uncertainty over Europe and the prolonged political and regulatory fallout from JPMorgan Chase's May 10 announcement of $2 billion in second-quarter hedge trading losses, the
KBW Bank Index
declined 5% last week to close at 41.93 Friday. The index is now up 6% year-to-date, but has fallen 17% from its closing high of 50.26 on March 26.
Since the market "bias has shifted to the downside in the near term as rates continue to fall," Miller said he would "remain on the sidelines with banks whose earnings are sensitive to falling asset yields and lack significant contribution from fee-based businesses."
With long-term rates at historical lows -- U.S Treasury 10-year bonds were yielding less than 1.50% on Friday -- and with most banks nearing the point where their funding costs can't decline any further, FBR expects "accelerated and meaningful net interest margin (NIM) compression," pressuring earnings "in the near time for most financials."
Miller said the difficult operating environment leading to an earnings decline "could push the industry into the long-awaited merger boom. The main barrier to a robust M&A market thus far has been a wide bid/ask spread, and a prolonged path to recovery may shrink the delta as sellers moderate expectations."
In light of strong refinancing volume -- driven in part by President Obama's expansion of the Home Affordable Refinance Program, or HARP 2.0, which allows borrowers with mortgages held by
to refinance their homes at today's historically low rates, even if the decline in property values over the past several years left their homes worth much less than the loan being refinanced -- Miller said that mortgage loan "origination volumes remain robust and should drive another few quarters of strong mortgage banking revenue."
While saying that strong mortgage fee revenue would "not be enough to offset the impact of a deteriorating economic environment and depressed asset yields on many institutions," Miller said that lenders with "significant servicing and origination exposure will be better protected from these negative effects and will outperform the group."
Miller recommended four financial names that are well-positioned with strong mortgage origination and mortgage servicing businesses benefitting from "the pullback of major players," including Bank of America and Ally Financial, while also highlighting three "company-specific opportunities among other regional banks." All seven companies are rated "Outperform" by FBR.
Here are FBR's seven defensive financial stock picks, beginning with the mortgage lenders:
closed at $30.16 Friday, returning 11% year-to-date, following a 10% decline during 2011.
Based on a quarterly payout of 22 cents, the shares have a dividend yield of 2.92%.
The shares trade for 1.9 times tangible book value, according to Thomson Reuters Bank Insight, and for eight times the consensus 2013 earnings estimate of $3.68, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $3.28.
Miller on Monday increased his 2012 GAAP EPS estimate for Wells Fargo to $3.30 from $3.23, and his operating earnings estimate to $3.23 from $3.12, "based on our expectation for increased mortgage banking revenue from higher originations to offset the negative impact of a lower net interest margin." The analyst also lowered his "FY13 GAAP and operating EPS estimates to $3.38 from $3.65 as earnings are negatively affected from falling asset yields and moderating origination volumes."
Miller left his price target for Wells Fargo's shares unchanged, at $39.00.
Interested in more on Wells Fargo? See TheStreet Ratings' report card for
PNC Financial Services Group
PNC Financial Services Group
of Pittsburgh closed at $58.07 Friday, returning 2% year-to-date, after declining 3% last year.
Based on a quarterly payout of 35 cents, the shares have a dividend yield of 2.41%.
The shares trade for 1.3 times tangible book value, and for eight times the consensus 2013 earnings estimate of $6.87. The consensus 2013 EPS estimate is $6.20.
Miller on Monday lowered his "FY12 GAAP and operating EPS estimates to $6.39 and $6.73 from $6.65 and $7.00, respectively, to reflect a decreased net interest margin expectation." The analyst also cut his 2013 GAAP and operating EPS estimate to $7.06 from $7.40.
Miller left his price target for PNC unchanged at $68.00.
Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for
Fifth Third Bancorp
Fifth Third Bancorp
of Cincinnati closed at $12.54 Friday, down 1% year-to-date, following an 11% decline during 2011.
Based on a quarterly payout of eight cents, the shares have a dividend yield of 2.55%.
The shares trade for 1.2 times tangible book value, and for eight times the consensus 2013 earnings estimate of $1.51. The consensus 2013 EPS estimate is $1.49.
On Monday, Miller cut his price target for Fifth Third's shares by a dollar to $17, "to reflect slightly lower earnings expectations as a result of falling asset yields,," while saying the price target was equal to 11.5 times his 2013 EPS estimate of $1.48, "which is still a premium to large-cap peers."
The analyst cut his "FY12E GAAP and operating EPS to $1.53 and $1.40 from $1.56 and $1.42, respectively, largely based on our expectation for a lower net interest margin whose earnings impact is partially offset by higher mortgage banking revenues."
Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for
of Mount Laurel, N.J., closed at $15.99 Friday, returning 49% year-to-date, after falling 54% during 2011. The company originates mortgage loans, as well as providing a variety of mortgage loan related services to others. PHH also has a Fleet Management Services segment, providing an array of vehicle fleet financing services.
The shares trade for 0.6 times their reported March 31 tangible book value $26.42, and for eight times the consensus 2013 earnings estimate of $2.06. The consensus 2013 EPS estimate is $2.28.
Miller's price target for PHH is $23, and the analyst estimates the company will report GAAP EPS of $2.54, with operating earnings of $1.95 during 2012, followed by EPS of $2.50 during 2013.
Last Tuesday, Miller added PHH to the "FBR Top Picks" list, saying that "higher origination expectations from the Mortgage Bankers Association (MBA) coupled with several headwinds for banks should position PHH to outperform the sector," and that "we continue to see a significant amount of value within the company's current platform and expect robust earnings going forward as management continues to take steps to address liquidity and costs and to solidify the core businesses."
Interested in more on PHH Corp.? See TheStreet Ratings' report card for
of Waterbury, Conn., closed at $19.20 Friday, down 5% year-to-date, following a 4% return during 2011.
Based on a quarterly payout of 10 cents, the shares have a dividend yield of 2.08%.
The shares trade for 1.3 times tangible book value, and for 11 times the consensus 2013 earnings estimate of $1.82. The consensus 2013 EPS estimate is $1.74.
FBR analyst Bob Ramsey on Monday lowered his 2012 EPS estimate for Webster by a penny to $1.74 and his 2013 estimate by a nickel to $1.90, "based on a lower margin assumption."
After Webster Financial reported its first-quarter results in late April, Ramsey reiterated his $27 price target for the shares, saying that the stock's valuation at 11 times his 2013 EPS estimate was "an unjustified discount to peers, in our opinion, given the company's sound capital position, good credit quality, and growing balance sheet."
Interested in more on Webster Financial? See TheStreet Ratings' report card for
of New York closed at $58.70 Friday, down 2% year-to-date, following a 20% return last year.
The shares trade for 1.9 times tangible book value, and for 14 times the consensus 2013 earnings estimate of $4.21. The consensus 2013 EPS estimate is $3.66.
Ramsey on Monday lowered his 2012 EPS estimate for Signature Bank to $3.65 from $3.70 and his 2013 estimate to $4.30 from $4.45, based on the expectation of a reduced net interest margin.
The analyst left his price target for Signature Bank at $75. In April, Ramsey said that the bank's "new equipment/ transportation financing subsidiary a big positive for the story, and a catalyst for shares to outperform," providing "another avenue for Signature to grow loans and utilize its low cost deposit funding," and that "these generally short-duration loans also improve Signature's interest rate positioning and offer better yields than securities."
Interested in more on Signature Bank? See TheStreet Ratings' report card for
First Commonwealth Financial
First Commonwealth Financial
of Indiana, Penn., closed at $5.91 Friday, returning 14% year-to-date, following a 24% decline during 2011.
Based on a five-cent quarterly payout, the shares have a dividend yield of 3.38%.
The shares trade for 1.1 times tangible book value, and for 12 times the consensus 2013 earnings estimate of 51 cents. The consensus 2013 EPS estimate is 42 cents.
Ramsey on Monday left his $7.50 price target for FCF Financial unchanged, while lowering his 2012 EPS estimate by a penny to $44 cents and his 2013 estimate by three cents to 47 cents, because of an expected decline in the company's net interest margin.
Interested in more on First Commonwealth Financial? See TheStreet Ratings' report card for
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.