NEW YORK (
) -- Investors looking toward a summer of discontent for the largest banks should consider regional names levered to the U.S. housing recovery and commercial loan growth, according to Wells Fargo analyst Matthew Burnell.
Burnell on Thursday upgraded
Fifth Third Bancorp
to "Outperform," from "Market Perform" ratings, preferring "leverage to stabilizing/improving U.S. residential real estate and manufacturing strength amid euro-zone volatility."
The analyst said that "U.S. mortgage loan activity remains healthy (thanks to even lower rates and a HARP 2.0 refinancing boom) and C&I loan growth has proven resilient. HARP is the Home Affordable Refinance Program, which was expanded by President Obama earlier this year, to allow 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.
Burnell said that U.S. regional banks' "profit performance - and less international exposure - justify premium valuations." A quick look at the valuations for the three largest U.S. banks highlights just how low the international exposure, regulatory pressure at home, and
second-quarter hedge trading loss announced on May 10, have pushed down valuations.
- Shares of Citigroup (C) - Get Report closed at $26.00 Wednesday, down 1% year-to-date, following a 44% decline during 2011. The shares trade for just over half their tangible book value, according to Thomson Reuters Bank Insight, and for less than six times the consensus 2013 earnings estimate of $4.66, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.09.
- Shares of Bank of America (BAC) - Get Report closed at $7.20 Wednesday, returning 30% year-to-date, after falling 58% last year. The shares trade for 0.6 times tangible book value, and for seven times the consensus 2013 EPS estimate of $1.02. The consensus 2012 EPS estimate is 58 cents.
- JPMorgan closed at $32.96 Wednesday, returning 0.5% year-to-date, following last year's 20% decline. The shares trade just above tangible book value, and for six times the consensus 2013 EPS estimate of $5.40. The 2012 consensus EPS estimate is $4.43. JPMorgan features an attractive dividend yield, which CEO James Dimon said the company was defending, when announcing a decision to suspend share buybacks. Based on a 30-cent quarterly payout, the dividend yield is 3.64%.
Among the three universal banks listed above, Burnell remains "partial" to JPMorgan and Citigroup -- rating both "Outperform -- although he is "cautious on the near-term (3-6 months)outlook in light of macroeconomic and regulatory uncertainty."
The regional banks upgraded by Burnell trade at higher multiples to forward earnings than the three universal banks:
FifthThird's shares closed at $13.23 Wednesday, returning 5% year-to-date, following an 11% decline during 2011.
Based on a quarterly payout of eight cents, the shares have a dividend yield of 2.42%.
Fifth Third trades for 1.2 times tangible book value, and for nine times the consensus 2013 EPS estimate of $1.51. The consensus 2012 EPS estimate is $1.49.
The Cincinnati lender saw its first-quarter mortgage revenue double from a year earlier, while commercial loans grew 5% sequentially. Please see
for more details on Fifth Third's first-quarter results.
Burnell said he upgraded Fifth Third because a "focus on
commercial and industrial or C&I lending and mortgage banking should help support returns in 2012," and also because of "relatively healthier economic trends in its core markets," the ability to increase its return of capital to investors this year, through share buybacks or a dividend increase, and "attractive relative valuation."
The analyst said that Fifth Third's "concentration in C&I lending benefits from not only a growing focus on middle-market lending (augmenting its traditional larger corporate focus) but also its Midwestern location at a time of rebounding manufacturing activity across its footprint." Fifth Third also "has modest direct exposure to continental Europe ($1.5B, of which $0.9B is funded) with less than $0.2B of exposure to the peripheral five Euro-zone countries."
Burnell's valuation range for Fifth Third's shares is $15 to $16, and he estimates that the company will earn $1.45 a share this year, followed by 2013 EPS of $1.55.
Interested in more Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.
SunTrust's shares closed at $22.17 Wednesday, returning 26% year-to-date, following a 40% decline during 2011.
The shares trade just below tangible book value, and for eight times the consensus 2013 EPS estimate of $2.68. The consensus 2012 EPS estimate is $1.91.
Burnell said that "following three consecutive years of negative core earnings due to a U.S. housing depression," and the repayment of government bailout money and a return to profitability during 2011, "positive momentum has continued in 2012, with STI generating nearly $2.00 in annualized core EPS in Q1 2012, double the 2011 level."
The analyst also said that SunTrust was "best positioned to take advantage of HARP 2.0 within our coverage universe," because of "the firm's footprint is heavily exposed to the Southeast, which was one of the epicenters of the U.S. real estate boom and bust." Burnell also believes that "mortgage putback provisions likely peaked in 2011 at $502MM, and STI is highly confident that putbacks will be "appreciably lower" in 2012, suggesting a significant rebound in mortgage production income is likely."
Based on their multiple to tangible book value, Burnell said that SunTrust "now trades at a 31% discount to its 5-year average despite having weathered a residential real estate depression in its Southeastern U.S. footprint and offering population growth 25% above the national average," and that "with mounting evidence that many of its core markets are stabilizing and/or recovering, we expect STI to generate high-single digit core
return on tangible common equity in 2012," with a double-digit return on tangible common equity in 2013.
Burnell's valuation range for SunTrust is $23 to $25, and he estimates that the bank will earn $1.85 a share during 2012, followed by earnings of $2.65 a share in 2013.
Interested in more SunTrust? See TheStreet Ratings' report card for this stock.
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.