NEW YORK (
) -- Now is the time for long-term investors to consider building positions in heavily discounted bank stocks.
Following last week's decent showing for bank stocks in the wake of ratings downgrades by Moody's Investor Service, increasing clarity on banks' enhanced regulatory capital requirements, continued U.S. economic reports showing a growth slowdown, and signs that European leaders could muddle their way through saving the common currency, heavily discounted high-volume bank stocks may be able to begin recovering to levels reached earlier this year.
KBW Bank Index
closed at 45.09 Friday, up 1% for the week and up 14.5% year-to-date, however, the index was down 10% from its closing high of $50.26 on March 26.
For the investment banks, the ratings downgrades announced by Moody's act as something of a "reset" for
, especially after the ratings firm surprised investors -- and apparently even Morgan Stanley -- with a
, instead of the expected three-notch downgrade.
With investor jitters continuing for Morgan Stanley over weak second-quarter revenue prospects in a tepid economy, even Deutsche Bank analyst Michael Carrier -- who sees 41% upside for the shares, based on a $20 price target and Friday's closing price of $14.14 -- rates the shares a "Hold."
So why should investors consider Morgan Stanley? One reason is that the shares of this profitable investment bank trade for just over half their reported March 31 tangible book value of $27.37. The company is also very strongly capitalized, with a Basel I Tier 1 common capital ratio of 13.3% as of March 31, increasing dramatically from 12.7% the previous quarter and 8.9% a year earlier.
Under Basel III, allowable Tier 1 capital will be reduced, while risk-weighted assets will increase, pushing the Tier 1 common ratio down, but banks have until January 2019 to achieve full compliance with the new capital standards, and Morgan Stanley estimated in its first-quarter 10-Q filing that "its pro forma Tier 1 common capital ratio under Basel III will be in a range between 8% and 10% by the end of 2012." With a minimum Tier 1 common equity ratio requirement of 7.5%, plus a possible 2.5% capital buffer required as a "systemically important financial institution," Morgan Stanley could conceivably comply with the enhanced capital requirements by the end of this year, or five-years before the fully phase-in of Basel III requirements.
Under new regulatory guidance for "advanced banks," Citigroup analyst Keith Horowitz on Thursday estimated that Morgan Stanley's pro forma Basel III Tier 1 common equity ratio would be 8.5%, which is within the range of 8% to 9% that Morgan Stanley CEO James Gorman recently estimated. That's considerably higher than Citi's estimates for
Bank of America
, although, of course, several of those names have been posting higher recent returns on equity than Morgan Stanley.
JPMorgan Chase analyst Vivek Juneja on June 11 estimated that
"Tier 1 common ratio under Basel 3 likely to exceed 8% by the end of 2012."
While lowering its long-term debt rating for Morgan Stanley to Baa1 from A2 last week, because of concerns over "(i) the firm's commitment to the global capital market business, on which it relies heavily for earnings; (ii) its historically high level of earnings volatility; and (iii) the problems in risk management and controls the firm suffered during the crisis," Moody's said on Thursday that its concerns were partially mitigated by "(i) the firm's gradually increasing "shock absorbers" in the form of earnings from other more stable businesses (albeit still below that of most peers); (ii) its reduced risk appetite, improved liquidity profile and stronger capital position; and (iii) enhancements to risk management, internal processes and controls."
Morgan Stanley's shares are trading at an historically low six times the consensus 2013 earnings estimate of $2.24 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $1.39.
Goldman Sachs is also trading at relatively low valuations. The shares closed at $93.63 Friday, or 0.8 times their reported March 31 tangible book value of March 31 tangible book value of $123.94, and for 7.5 times the consensus 2013 EPS estimate of $12.83. The consensus 2012 EPS estimate is $11.22. Carrier sees 44% upside for Goldman, based on Friday's closing price and his price target of $135, rating the shares a "Buy."
Looking at other large-cap bank holding companies, there are six high-volume components of the KBW Bank Index that traded below tangible book value as of Friday's close, according to Thomson Reuters Bank insight. Here they are, in descending order by valuation to their reported March 31 book value:
6. Zions Bancorporation
of Salt Lake City closed at $19.13 Friday, returning 18% year-to-date, after declining 33% last year.
The shares trade just below the company's reported March 31 tangible common equity per common share of $19.39, and for ten times the consensus 2013 earnings estimate of $1.85. The consensus 2012 EPS estimate is $1.27.
D.A. Davidson analyst Gary Tenner on June 5 upgraded Zions Bancorporation to a "Buy" rating with a 12-18 month price target of $22 and a five-year price target of $40. That's a refreshing approach, since most sell-side analysts stick to 12-month price targets for long-term investments.
Tenner upgraded the shares because they had declined 15% since his April 24 downgrade to a "neutral rating, saying after the shares closed at $17.54 on June 4 that "we find value in ZION shares trading at a 10% discount to 1Q12
tangible book value of $19.39 and an 18% discount to our year end 2013 estimated TBV of $21.46."
Tenner's actions illustrate the volatility for the shares over the short-term.
While most industry players face compression of net interest because "low short-term rates have been a constant feature on the banking landscape since December 2008 and have been joined more recently by historically low longer-term treasury yields," Tenner said that "ZION may not be as impacted as others."
"Given ZION's small securities portfolio (8.2% of earning assets) and high cash balances, the company's average earning asset yield already incorporates a high degree of low-yielding assets." Redemption of higher yielding trust preferred securities, along with the expected repayment of $700 million in remaining federal bailout funds received through the Troubled Assets Relief Program, or TARP, 2008, will also mitigate some of the company's margin compression.
Tenner estimates that Zions will earn $1.13 a share this year, followed by 2013 EPS of $1.65.
Interested in more on Zions Bancorporation? See TheStreet Ratings' report card for
of Dallas closed at $30.28 Friday, returning 18% year-to-date, following a 38% decline during 2011.
Based on a 15-cent quarterly payout, the shares have a dividend yield of 1.98%.
The shares trade for 0.9 times their reported March 31 tangible common equity per share of common stock of $32.06, and for 11 times the consensus 2013 earnings estimate of $2.71. The consensus 2012 EPS estimate is $2.51.
Wunderlich Securities analyst Kevin Reynolds on June 18 reiterated his "Buy" rating for Comerica, with a $37 price target, saying that "negative psychology toward the banking sector has outweighed this strong fundamental story," and that the company "has one of the strongest balance sheets of any regional bank in the U.S., and its shares trade at a modest, but in our view unwarranted, discount to its regional bank peers."
According to Thomson Reuters Bank Insight, Comerica's first-quarter operating return on average assets improved to 0.84%, from 0.68% in the fourth quarter and 0.77% during the first quarter of 2011.
Reynolds's price target is "just 1.1 times
his projected TBV/share, offering a total return of roughly 25%, inclusive of CMA's 2.0% dividend yield."
The analyst estimates Comerica will earn $2.60 a share this year, followed by 2013 EPS of $2.85.
After the company repurchased 1.1 common shares for $33 million during the first quarter, Reynolds said Comerica had bought back 2.9 million shares for $88 million so far during the second quarter, "at an average price of $30.50, under its existing $375 million buyback program."
Interested in more on Comerica? See TheStreet Ratings' report card for
4. SunTrust Banks
of Atlanta closed at $23.02 Friday, returning 31% year-to-date, after a 40% decline during 2011.
The shares trade for 0.9 times their reported March 31 tangible book value of $25.49, and for nine times the consensus 2013 earnings estimate of $2.65, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $1.90.
Goldman Sachs analyst Ryan Nash has a neutral rating for SunTrust, even though he said the shares were "compelling" on June 13, saying he expects "major improvement the next few quarters" in the bank's "environmental cost" as it continues to work through problem loans and maintain and sell repossessed property. Nash also expects high refinancing volume from President Obama's expansion of the Home Affordable Refinance Program, or HARP 2.0, to "help fund near-term put-backs" of securitized mortgage loans.
HARP 2.0 allows mortgage loan borrowers with loans held by
to refinance their homes at today's historically low rates, no matter how much the value of the collateral property has declined.
Nash reiterated his neutral rating for SunTrust because "put-backs remain unpredictable," while saying that his firm's "analysis sees $800mn of further put-back losses," while SunTrust has estimated another $600 million in mortgage repurchase losses. In support of the neutral rating, the analyst also cited "outsize margin pressure," expecting SunTrust's net interest margin to compress by 27 basis points, versus "consensus of 13bp."
Interested in more on SunTrust? See TheStreet Ratings' report card for
of Cleveland closed at $7.62 Friday, for a flat year year-to-date return, following a 12% decline during 2011.
Based on a five-cent quarterly payout, the shares have a dividend yield of 2.63%.
The shares trade for 0.8 times their reported March 31 tangible book value of $9.28, and for nine times the consensus 2013 earnings estimate of 81 cents. The consensus 2012 EPS estimate is 77 cents.
Deutsche Bank analyst Matt O'Connor on June 12 reiterated his "Buy" rating for KeyCorp, with a $9.00 price target, after meeting with CEO Beth Mooney and CFO Jeff Weeden, saying the shares had lagged "over concerns that earnings power will be sluggish and capital deployment
through further dividend increases and/or share buybacks will take a while to play out."
KeyCorp's management expects the company's second-quarter net interest margin to be "relatively flat" from 3.16% in the first quarter, according to O'Connor, who said the company's management of its margin has been "underappreciated," as the bank "hasn't purchased bonds at premiums," so "there's less risk vs. some peers of hits related to accelerated premium amortization," and management "remains disciplined in commercial loan pricing, seeming less willing than some to cut rates for growth."
O'Connor also believes "an expense reduction initiative aimed to cut costs by $125-200m (or 5% plus) over the next 2 years is possible, boosting EPS by $0.10 or 10-15%."
The analyst estimates that KeyCorp will earn 75 cents a share this year, followed by 78 cents in 2013.
Interested in more on KeyCorp? See TheStreet Ratings' report card for
2. Bank of America
Bank of America
closed at $7.94 Friday, returning 43% year-to-date, after dropping 58% last year.
The shares trade for 0.6 times their reported March 31 tangible book value of $12.87, and for eight times the consensus 2013 earnings estimate of $1.01 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 60 cents.
Guggenheim Securities analyst Marty Mosby last Tuesday reiterated his "Buy" rating for Bank of America, with an $11 price target, saying the company's "franchise value less incremental losses places BAC's inherent value between $11 and $17 a share," even "after absorbing close to $100 billion of losses from its
mortgage overhang issues, representing at least 40% upside potential."
Mosby said that "BAC could still lose from $30 billion to $90 billion over the next several years," from mortgage putbacks springing from the company's purchase of Countrywide Financial in 2008, but "even if we assume these losses are netted against tangible book value today, we still estimate BAC's worst case franchise value to be around $11 and a base case franchise value of $17, representing 40% and over 100% upside potential, respectively."
The analyst is out in front of the consensus, estimating that Bank of America will earn 75 cents a share this year, followed by EPS of $1.10 in 2013.
Interested in more on Bank of America? See TheStreet Ratings' report card for
closed at $27.99 Friday, returning 6% year-to-date, following last year's 44% decline.
The shares trade for 0.6 times their reported March 31 tangible book value of $50.90, and six times the consensus 2013 earnings estimate of $4.62, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.09.
Credit Suisse analyst Moshe Orenbuch rates Citigroup "Outperform," with a $48 price target, saying on Thursday that although international "slowing trends concern investors, these markets (in aggregate) have had faster growth and command higher valuations that the U.S.," and that his firm's "sum-of-the-parts analysis of Citicorp's international segments based on current P/E and P/BV multiples for the regions, derives $45-50 of value for Citicorp's ongoing operations."
Citigroup reported that 60% of its first-quarter revenue came from outside the United States.
Orenbuch added that Citigroup's emerging markets business "is quite diverse by product, business line and country," and that the company "pursues a targeted strategy in international markets with a focus on the pursuit of market share in regions positioned for strong GDP growth," complimenting its "pursuit of banking affluent consumers and global-minded corporate clients-which ultimately positions the company for stronger loan, deposit and earnings growth."
The analyst estimates that Citi will earn $4.25 a share this year, followed by EPS of $5.00 in 2013.
Moody's on Thursday cut its long-term credit rating for Citigroup toBaa2 from A3, with a negative outlook, while affirming its short-term rating of P-2. Citigroup reacted with unusual bitterness, saying in a statement that it "strongly disagrees with Moody's analysis of the banking industry and firmly believes its downgrade of Citi is arbitrary and completely unwarranted," adding that "Moody's approach is backward-looking and fails to recognize Citi's transformation over the past several years, the strength and diversity of Citi's franchise, and the substantial improvements in Citi's risk management, capital levels and liquidity."
The company went on to say that "at the end of the first quarter of 2012, Citi had over $420 billion of surplus liquidity held generally in cash and government securities," and that its liquidity even exceeded "the proposed Basel III Liquidity Coverage Ratio requirement with a ratio of approximately 125%, even though this measurement does not go into effect until 2015."
Interested in more on Citigroup? See TheStreet Ratings' report card for
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.