Bank Stocks No Longer Cheap: KBW
NEW YORK (
) -- Bank stocks are no longer "fundamentally undervalued" and will need to deliver on earnings in order to outperform in 2012, according to KBW analysts.
Financial stocks have rallied in the first few weeks of 2012, prompting questions about whether this year could be the "year of outperformance" for the sector. Financials have not outperformed the S&P 500 in five years.
Still, in a research note Sunday, the analysts note that financial stocks overall do not look particularly cheap on a 2012 forward earnings basis when compared to the S&P 500, although they still trade relatively cheaper on a price-to-book basis.
"Reviewing the historical trends in relative market cap, employment and valuation, there is no reason to believe, in our opinion, that financials are fundamentally undervalued and can continue to outperform the S&P without expanded earnings capacity," analysts led by Fred Cannon wrote in a note.
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Bank stocks are undergoing a "balance sheet rally", Cannon said in an interview last Friday. Meaning, investors' concerns about the quality of bank's assets are easing on hopes that the European crisis will not result in Armageddon or optimism that the foreclosure settlement will reduce banks's exposure to further mortgage liability.
The KBW Bank Index trades at 10.34 times 2012 earnings estimates according to data available on
Bloomberg
. That compares to an S&P 500 PE ratio of 12.8. On a price-to-book basis, bank stocks trade at just 0.76, compared to a ratio of 2 in the S&P 500.
While
Bank of America's
(BAC) - Get Report
shares are still cheaply priced at just 0.65 tangible book value, according to HighlineFI, the rising share price, combined with a slew of earnings estimate cuts by analysts, had the shares trading for nearly 11 times the consensus 2012 EPS estimate of 72 cents, among analysts polled by
Thomson Reuters.
Citigroup trades for 8.4 times the consensus 2012 EPS estimate of $3.99, and for just under 0.7 times tangible book value.
Markets have also bid up weaker players such as
Regions Financial
(RF) - Get Report
,
Synovus
(SNV) - Get Report
and
SunTrust
(STI) - Get Report
. Regions traded for 0.9 times tangible book value at Friday's close, and a rather high multiple of 12.5 times the consensus 2012 EPS estimate.
SunTrust trades just below book value, according to HighlineFI, but for nearly 13 times the consensus 2012 EPS estimate of $1.74.
Synovus trades for 0.8 times tangible book value and for nearly 19 times the consensus 2012 EPS estimate of 10 cents.
Read more about the recent bank stock outperformers in
5 Booming Bank Stocks Poised to Fall
According to Cannon, rallies based just on the argument that stocks are trading at a discount to book is not justified and that price- to- book ratios needs to be seen in context of returns to book value or return on equity. " If all these banks can earn is only 2% on their book, why should you buy them? If it were a bond, you would not do it," he said.
Of course earnings estimates might prove to be too conservative if capital markets revenues turn out to be better than expected in 2012.
Investors need to see upgrades in earnings for the rally in bank stocks to continue.
--Written by Shanthi Bharatwaj in New York
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