Updated with market close information, the European Central Bank's expansion of eligible collateral and a discussion on Regions Financial.
NEW YORK (
ended up the winner among the largest U.S. financial names on Friday, with shares rising 3% to close at $6.68.
The broad indexes all rose after the European Central Bank boosted available liquidity for eurozone banks, by lowering collateral requirements for its lending activities. The central bank's governing council "reduced the rating threshold and amended the eligibility requirements for certain asset-backed securities (ABSs)," thus broadening "the scope of the measures to increase collateral availability which were introduced on 8 December 2011 and which remain applicable."
The central bank also added ABS backed by auto loans, leases and consumer loans, as well as commercial loans "which have a second-best rating of at least 'single A' in the Eurosystem's
harmonized credit scale, at issuance and at all times subsequently" to eligible collateral types, applying a 16% haircut.
In addition, the central bank said it would accept residential mortgage backed securities and "securities backed by loans to small and medium-sized enterprises (SMEs), auto loan, leasing and consumer finance ABSs and CMBSs which have a second-best rating of at least 'triple B'", applying a 32% haircut to the CMBS and a 26% haircut to the other new "triple B" collateral.
KBW Bank Index
rose over 1% to close at 45.09, with all 24 index components rising for the session, except for Capital One, which was down slightly, to close at $52.95. Capital One's shares have risen 25% year-to-date.
The banking sector had a strong showing following the announcement by Moody's Investor Service late Thursday of
for 15 "firms with global capital markets operations."
Credit Suisse analyst Howard Chen said on Friday that "the conclusion of yesterday's review removes a major overhang that has been weighing on the shares" of the largest U.S. banks, but added that "it's a modest negative" that Moody's "has kept the sector (holding company only) on negative outlook given the lack of clarity on
regulatory resolution authority."
Chen said "we continue to recommend purchase of the major U.S. bank stocks," highlighting "Outperform-rated"
"as among the best positioned to win share in the event that impact from ratings actions are more extreme and drive material share shifts," and adding that "over the near-term, we believe Morgan Stanley should be a relative outperformer given the better than expected two-notch downgrade."
Low stock valuations support Chen's recommendations:
- Shares of Goldman Sachs declined slightly to close at $93.63. The shares trade for 0.8 times their reported March 31 tangible book value of $123.94, and for seven times the consensus 2013 EPS estimate of $12.93, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $11.28. At the holding company level, Moody's lowered Goldman's long-term senior unsecured debt rating by two notches to A3 from A1. Deutsche Bank analyst Michael Carrier on Wednesday cut his price target for Goldman's shares to $135 from $145, but reiterated his "Buy" rating for the shares, seeing 40% upside for the shares.
- Shares of JPMorgan Chase rose 2% to close at $36.10, trading just above their reported March 31 tangible book value of $34.91, and for less than seven times the consensus 2013 earnings estimate of $5.32 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.36.
- Morgan Stanley (MS) - Get Report -- which Chen also rates "Outperform" -- rose over 1% to close at $14.14. The shares trade for just over half their reported March 31 tangible book value of $27.37 and for six times the consensus 2013 EPS estimate of $2.25. The consensus 2012 EPS estimate is $1.39.
Morgan Stanley previously disclosing in its first-quarter 10-Q filing that according to the company's stress tests of its March 31 trading positions, its trading counterparties could call "additional collateral, termination payments or other contractual amounts" of $7.2 billion, in the event of a three-notch downgrade of its long-term credit rating by Moody's Investor Service and a subsequent downgrade by Standard and Poor's, along with another $2.4 billion in "increased collateral requirement at certain exchanges and clearing organizations," for total potential collateral calls of $9.6 billion.
Moody's surprised investors by announcing a two-notch downgrade of Morgan Stanley's long-term senior unsecured debt rating to Baa1 from A2, the company faces total collateral calls of $6.8 billion, based on its March 31 trading positions.
After saying Thursday morning that Morgan Stanley seemed "confident" that the ratings downgrade would "not have an outsized impact on the firm," with the "primary revenue impact from the downgrade
to be in its long-dated, uncollateralized interest rate derivatives, which MS has already de-emphasized," UBS analyst Brennan Hawken said on Friday that the company's "operating subsidiary rating now remains in line with many of its global bulge bracket competitors, instead of being an outlier (as would have been the case in a three notch downgrade)."
Hawken said that Moody's "ratings action should relieve much of the concern over potential revenue headwinds from a more negative outcome," but that while "the two notch downgrade likely takes away the more pressing threat to MS's more capital intensive businesses," the company "still needs regulatory approval to move its derivatives book into the bank subsidiary," and that "the difficult environment could make this a rather drawn out process, with the recent
hedge trading losses at JPMorgan Chase exacerbating the issue."
Morgan Stanley's shares have now declined 6% year-to-date, following a 44% decline during 2011.
Hawken rates Morgan Stanley a "Buy," with a $19 price target, saying the shares "are cheap, even when we assume very negative outcomes from some of the exogenous issues facing the firm." The analyst is behind the consensus, estimating 2012 operating EPS of $1.20 a share for Morgan Stanley, but matches the consensus, with a $2.25 EPS estimate for 2013.
KBW analyst David Konrad on Friday called Morgan Stanley "the clear winner" following the downgrades, "as the bank received only a two notch downgrade versus the three notches that had been anticipated," while JPMorgan Chase,
and Goldman Sachs "all received a two notch downgrade as expected and
Bank of America's
one notch downgrade was in line with expectations as well."
Konrad said Morgan Stanley "has recently been underperforming its universal bank peers primarily due to concerns over the sustainability of certain
fixed income, currencies and commodities trading revenues (capital-intensive structured products business) in light of the potential for a three notch Moody's downgrade to Baa2," but with the two-notch downgrade said "we believe that the company's ability to continue in this business will be unaffected."
Konrad added that Morgan Stanley's hopeful "approval to move much of its derivatives to the bank level," may "create funding benefits and potentially mitigate against further downgrades."
KBW rates Morgan Stanley "Market Perform."
Interested in more on Morgan Stanley? See TheStreet Ratings' report card for this stock.
Regions Financial's stock has now returned 56% year-to-date, following a 38% decline in 2011.
Interested in more on Regions Financial? See TheStreet Ratings' report card for this stock.
The shares trade for eight times the consensus 2013 EPS estimate of 77 cents, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 61 cents.
After selling its Morgan Keegan brokerage subsidiary and completing a $900 million common share offering during the first quarter, Regions in early April repaid $3.5 billion in government bailout funds received during 2008 through the Troubled Assets Relief Program, or TARP.
Goldman Sachs analyst Ryan on June 13 upgraded Regions to a "Buy" rating, with a price target of $8/00, calling that the Birmingham, Ala., lender, along with
of Atlanta, "two interesting ways to gain exposure to this given their concentrations in some of the hardest-hit markets in the Southeast."
The analyst maintained his neutral rating on SunTrust, since the company's mortgage loan "putbacks remain unpredictable," and because of "outsized margin pressure," with an estimated 27 basis point narrowing of the company's net interest margin this year.
Nash said that "a further recovery in real estate will drive both provisions and environmental costs lower," as Regions and SunTrust spend less on maintaining and marketing repossessed real estate, and set aside less money for loan loss reserves.
The also said that "although low rates hurt, RF has offsets as funding benefits and liquidity deployment
are expected to mitigate asset yield pressure and drive its
net interest margin up by 10 basis points by YE 2013E."
Nash estimates that Regions Financial will earn 64 cents a share this year, followed by EPS of 80 cents in 2013.
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.