Updated with information on BOFI's common share offering.
NEW YORK (
has revisited a list of 10 bank stock picks made over a year ago based on low price multiples to forward earnings estimates; the results are a mixed bag.
Back in September 2010, we presented a list of 10 actively traded bank stocks, with average daily trading volume of over 50,000 shares, trading at the lowest multiples to consensus 2011 earnings estimates. Out of the
that were selected based on closing prices and forward earnings estimates on Sept. 3, 2010, five had brought home positive total returns through Friday's market close.
Getting five out of ten picks right over a period of a year and three months would normally be a good track record, however, three of the picks saw very significant losses for investors.
During the same time period, the
KBW Bank Index
of large U.S. bank holding companies declined 17%.
If an investor had purchased $10,000 worth of shares in each of the 10 Cheapest Bank Stocks for 2011, the investor would have been left with $89,936 as of Friday's market close. This decline of just over 10% compares favorably to the KBW Bank Index's performance, but still hurts.
Over the past couple of years, sell-side analysts covering the largest U.S. banks have generally been "early," with buy recommendations based on historically low price multiples to book value and to forward earnings estimates. We covered this subject in detail last week, in
As we have seen, the enthusiasm for some of the biggest and cheapest banking names, is unabated.
, for example, is rated a buy by 23 out of 25 analysts.
Here's an update on
original September 2010 list of 10 Cheapest Bank Stocks for 2011, once again in descending order by forward price-to-earnings ratio:
10. Hudson Valley Holding Corp.
Hudson Valley Holding Corp.
of Yonkers, N.Y., closed at $20.12 Friday, rising 16% since Sept. 3, 2010, which was the market close upon which our original list of
Based on a regular quarterly payout of 20 cents, the shares have a dividend yield of 3.96%.
Hudson Valley had $2.9 billion in total assets as of Sept. 30, with 35 branches in New York and Connecticut.
The company in November paid a 10% common stock dividend, making 2011 "the 28th consecutive year that a stock dividend or stock split
had been declared.
Third-quarter net income was $8.5 million, or 48 cents a share, increasing from $4.1 million, or 23 cents a share, in the third quarter of 2010. Net interest income for the third quarter increased 10% year-over-year, to $30.0 million, with net loans increasing 19% year-over-year, to $2.0 billion as of Sept. 30. The third-quarter net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and wholesale borrowings -- increased to a strong 4.47% in the third quarter, from 4.09% a year earlier.
Credit costs declined, as the third-quarter provision for loan losses was $2.5 million, compared to $6.6 million a year earlier. Hudson Valley was one of only two banks out of the 10 listed here that didn't see a boost to the third-quarter bottom line by a release of loan loss reserves. Reserves totaled $42.2 million as of Sept. 30, increasing from $41.9 million in June.
The third-quarter return on average assets (ROA) was 1.19% according to SNL Financial.
The shares trade for 11.7 times the consensus 2012 earnings estimate of $1.72 a share among analysts polled by FactSet, and for 1.4 times tangible book value, according to SNL.
All four analysts covering Hudson Valley rate the shares a buy.
Hudson Valley has seen strong loan growth over the past year, which CEO James Landy attributes to a focus "on business banking in the Metro New York communities we've served for so long and so well." The company's consistent payout policy has also benefitted the shares.
9. Wells Fargo
closed at $26.07 Friday, returning 3% since Sept. 3, 2010. Based on a quarterly payout of 12 cents, the shares have a dividend yield of 1.84%.
The company and its investors have fared the best among the "big four" U.S. banks during a difficult year of regulatory clampdowns on
, the implementation of the Durbin amendment to lower fee revenue from debit card transaction charges, mortgage putback demands from investors, concern over eventual compliance with the enhanced Basel III capital requirements and exposure to European sovereign debt.
The company's third-quarter ROA of 1.29% was the best among the big four, although third-quarter earnings of $4.1 billion were boosted by an $854 million release of loan loss reserves. Please see
for a full discussion of the company's third-quarter results.
The shares trade for 8.1 times the consensus 2012 EPS estimate of $3.20 among analysts polled by FactSet, and for 1.5 times tangible book value, according to SNL Financial.
Guggenheim Securities analyst Marty Mosby rates Wells Fargo a "Buy." In Mosby's 2012 Outlook for Large-Cap Banks published on Nov. 14, the analyst raised his price target for the shares to $37 from $31.50, based on a multiple of 10.8 times Guggenheim's 2012 EPS estimate of $3.44. Mosby noted that at the then price-to-book ratio of 1.4 compared "to a historical average of 282% price to tangible book value."
Out of 23 analysts covering Wells Fargo, 20 rate the shares a buy, two have neutral ratings, and one analyst recommends selling the shares.
8. Oriental Financial Group
Oriental Financial Group
of San Juan, Puerto Rico, closed at $11.39 Friday, down 15% since Sept. 3, 2010. The company raised its quarterly dividend to six cents on Nov. 30, for a forward dividend yield of 2.11%.
The company also announced on Nov. 30 that as part of its authorized $70 million in share repurchases, it had bought back 2.1 million shares so far in the fourth quarter, for an average price of $10.33 a share, for a total cost of $21.7 million. Year-to-date repurchases totaled roughly $52 million.
The company had $7 billion in total assets as of Sept. 30, with 31 branches throughout the island territory.
Oriental reported third-quarter net income available to common shareholders of $15.6 million, or 35 cents a share, declining from $25.3 million in the second quarter but improving from a loss of $31.7 million a year earlier, when the company reported $14.7 million in impairment charges on securities and $22.6 million in losses on derivatives.
The earnings decline from the second quarter reflected "increased premium amortization in the third quarter of 2011 due to the decline in interest rates which caused an increase in pre-payments, versus a decrease in pre-payments and premium amortization in the second quarter of 2011," as well as lower investment securities balances.
Oriental's net interest margin narrowed to a tax-adjusted 2.57% during the third-quarter, from 3.33% the previous quarter and 3.63% a year earlier.
The shares trade for eight times the consensus 2012 EPS estimate of $1.42 among analysts polled by FactSet, and for 0.8 times tangible book value, according to SNL Financial.
All four analysts covering Oriental Financial Group rate the shares a buy.
7. Capital One Financial
Capital One Financial
of McLean, Va., closed at $45.34 Friday, returning 12% since Sept. 3, 2010.
Capital One is awaiting
approval of its agreement to purchase
for roughly $9 billion, following a series of three public hearings held by the Fed and completed in October, where various consumer groups voiced their opposition to the deal.
The Office of the Comptroller of the Currency has reopened its public comment period for Capital One's pending deal to acquire
U.S. credit card portfolio for a premium of $2.6 billion.
Capital One still expects the ING deal to be completed late this year or early in 2012, and for the HSBC deal to close in the second quarter.
Third-quarter net income was $813 million, or $1.90 a share, increasing from $803 million, or $1.81 a share, in the third quarter of 2010. Capital One's net interest margin expanded to 7.39% from 7.21% a year earlier. The third-quarter ROA was 1.72% according to SNL, which was, by far, the highest ROA among this group of 10 banks.
Guggenheim Securities analyst Marty Mosby has a neutral rating on Capital One, with a $44.50 price target, saying on Nov. 14 that "a smooth integration" of the two merger deals will be "critical, as the value of combining these two acquisitions together is significantly higher than each one independently."
The shares trade for 7.4 times the consensus 2012 EPS estimate of $6.14 among analysts polled by FactSet, and for 1.4 times tangible book value, according to SNL Financial.
Out of 18 analysts covering Capital One, 13 rate the shares a buy, four have neutral ratings, and one analyst recommends selling the shares.
6. BOFI Holding, Inc.
BOFI Holding, Inc.
of San Diego closed at $16.54 Friday, for a 36% return since Sept. 3, 2010.
The company had $2.1 billion in total assets as of Sept. 30, running its deposit gathering and lending operations online through its
BOFI Federal Bank
subsidiary, which was formerly known as Bank of Internet USA.
BOFI on Wednesday priced a public offering of 750,000 common shares at $16.00, saying that the proceeds would be used "for general corporate purposes and possible future acquisitions and growth opportunities. "
The company raised $7 million through a convertible preferred share offering in November, after raising $13.2 million in preferred equity during its fiscal fourth quarter, which ended Sept. 30.
BOFI reported net income attributable to common stock of $6.4 million for its fiscal first quarter of 2012 ended Sept. 30, or 58 cents a share, increasing from $4.8 million, or 45 cents a share, a year earlier. Third-quarter net interest income increased 43% year-over-year, to $18.2 million, as the company grew its loan portfolio 65% year-over-year, to $1.4 billion.
Noninterest income more than doubled year-over-year to $4.6 million in the fiscal first quarter, "primarily due to gain on sale of agency mortgage loans which increased to $2.1 million compared to $1.4 million for the quarter ended September 30, 2010," but also due to a $2.7 million gain on the transfer of $72.3 million in portfolio loans to held-for-sale.
BOFI's net interest margin during the fiscal first quarter was 3.65%, increasing from 3.55% a year earlier. The ROA for the fiscal first quarter was 1.28%.
Sandler O'Neill analyst Andrew Liesch rates BOFI a buy, with a $19 price target, saying in early November that although the company's shares trade at a "substantial premium to other U.S. thrifts on a book value basis," the premium "is well deserved given its superior credit quality, solid operating efficiency, positive earnings outlook and balance sheet growth prospects."
The shares trade for 7.4 times the consensus 2012 EPS estimate of $2.24 among analysts polled by FactSet, and for 1.2 times tangible book value, according to SNL Financial.
Both analysts covering BOFI rate the shares a buy.
5. Wilshire Bancorp
of Los Angeles closed at $3.35 Friday, down 46% since Sept. 3, 2010.
The company had $2.7 billion in total assets as of Sept. 30, with 24 branches in Southern California, Texas, New Jersey, and the New York City area, and six loan production offices in Colorado, Georgia, Texas (two offices), New Jersey, and Virginia.
Wilshire Bancorp owes $62.2 million in federal bailout funds received through the Troubled Assets Relief Program, or TARP. The company raised $109 million in common equity during the second quarter, following an agreement with regulators to bring main subsidiary Wilshire State Bank's Tier 1 leverage ratio up to at least 10%. The Bank subsidiary's Tier 1 leverage ratio was 13.24% as of Sept. 30.
Wilshire Bancorp reported third-quarter net income available to common shareholders of $10.2 million, or 14 cents a share, increasing from $5.0 million, or 14 cents a share, during the third quarter of 2010.
The main factor in the earnings improvement was a decline in the third-quarter provision for loan losses of $2.5 million, from $18.0 million a year earlier. A $5.7 million release of loan loss reserves during the third quarter directly boosted earnings.
Wilshire Bancorp's total assets declined 17% year-over-year, as the company continued working to reduce its commercial real estate exposure and its nonperforming loans. During the third quarter, the company sold $28.7 million in loans, most of which were nonperforming, for a gain of $1.7 million.
Net interest income declined 14% year-over-year to $25.5 million in the third quarter, reflecting the balance sheet reduction. The third-quarter net interest margin was a strong 4.23% in the third quarter, increasing from 3.93% a year earlier.
FIG Partners analyst Timothy Coffey on Oct. 28 reiterated his "Outperform" or "Buy" rating for Wilshire Bancorp, raising his 12-month price target to $4.50 from $3.80, anticipating that the company "could start to reverse the DTA-Deferred Tax Asset valuation allowance over the coming quarters," and that "the improvement in the earnings power has resulted in losses below management's projections, which has increased the valuation allowance to $40 million." Coffey estimated that "company could have no tax expense or very limited expense in 2012 before a normalized expense returns in 2013."
The shares trade for 6.7 times the consensus 2012 EPS estimate of 50 cents among analysts polled by FactSet, and for just above times tangible book value, according to SNL Financial.
Out of seven analysts covering Wilshire Bancorp, four rate the shares a buy, while the remaining analysts all have neutral ratings.
4. JPMorgan Chase
closed at $32.33 Friday, declining 16% since Sept. 3, 2010. Based on a 25-cent quarterly payout, the shares have a dividend yield of 3.09%.
JPMorgan stands out among the largest U.S. banks with that generous dividend payout, and following the next round of Federal Reserve
, investors are hoping for an increased return of capital, with a higher dividend payout and/or share buybacks.
for discussion of the company's third-quarter results.
After JPMorgan Chase announced its third-quarter results, FBR analyst Paul Miller lowered his 2012 earnings estimate for the company to $5.00 a share from $5.65, but reiterated his buy rating and $46.00 price target for the shares, saying the company was "well positioned with a 7.7% Tier 1 common ratio per Basel III requirements."
The shares trade for 6.6 times the consensus 2012 EPS estimate of $4.88 among analysts polled by FactSet, and for just below times tangible book value, according to SNL Financial.
Out of 25 analysts covering JPMorgan Chase, 23 rate the shares a buy and two have neutral ratings.
closed at $28.17 Friday, declining 28% from September 3, 2010, adjusting for the 1-for-10 reverse split on May 6.
On Nov. 29, U.S. District Judge Jed S. Rakoff in Manhattan
to settle securities fraud charges with the Securities and Exchange commission for $285 million, while neither admitting or denying guilt. The judge said that the agreement was "neither reasonable, nor fair, nor adequate, nor in the public interest."
full coverage of Citigroup's
and the continued progress of CEO Vikram Pandit's strategy to
Sterne Agee analyst Todd Hagerman on Nov. 17 reiterated his "Buy" rating on Citi, with a $40 price target, saying "the risk/reward on the shares should continue to improve steadily as management repairs its credibility gap with investors."
The shares trade for 6.4 times the consensus 2012 EPS estimate of $4.37 among analysts polled by FactSet, and for 0.6 times tangible book value, according to SNL Financial.
Out of 21 analysts covering Citigroup, 15 rate the shares a buy, four have neutral ratings, and two recommend selling the shares.
2. Bank of America
Bank of America
closed at $5.64, declining 58% since Sept. 3, 2010, which was the worst performance of these 10 picks, based on low valuations to consensus 2011 earnings estimates at that time.
Bank of America has faced a perfect storm this year, with mortgage putback claims leading to a $14.5 billion loss in its real estate services unit during the second quarter, feeding a net loss to the company of $8.8 billion, not to mention the revenue pressures from the implementation of the Durbin Amendment and the continuing concern over the company's eventual compliance with the enhanced Basel III capital requirements.
While CEO Brian Moynihan had said the company didn't plan to issue additional common shares as part of its efforts to boost its regulatory capital, the company on Friday confirmed that it had exchanged roughly $442.3 million in common shares to retire senior notes and trust preferred securities between Nov. 17 and Dec. 1.
Deutsche Bank analysts last month said they expected Bank of America to
Guggenheim Securities analyst Marty Mosby has a neutral rating on the shares, with a $6.50 price target, saying on Nov. 14 that "Until BAC can begin to resolve some of the Countrywide legacy residential real estate lending issues or investors want to invest in riskier alternatives, we believe BAC's stock price could remain under pressure."
The shares trade for 5.7 times the consensus 2012 EPS estimate of 99 cents among analysts polled by FactSet, and for 0.4 times tangible book value, according to SNL Financial.
Many analysts think that Bank of America's shares are at rock bottom. Out of 24 analysts covering the company, 10 rate the shares a buy, 13 have neutral ratings, and just one analyst recommends investors part with the shares.
1. Republic Bancorp
of Louisville, Ky., closed at $21.13 Friday, rising 13% since Sept. 3, 2010. Based on a quarterly payout of 15 cents, the shares have a dividend yield of 2.92%.
The company had $3.1 billion in total assets as of Sept. 30, with 42 branches mainly in Kentucky, but also in Indiana, Florida and Ohio.
On Nov. 16, Republic's board of directors authorized an additional 300,000 common shares for repurchase, for a total buyback authorization of 607,000 shares.
Republic Bancorp's main subsidiary --
Republic Bank & Trust Company
-- is in the midst of an ongoing dispute with the Federal Deposit Insurance corp. over the company's tax refund anticipation loans, which the FDIC said in a Feb. 9 Notice of Charges and Hearing needed to be "restrained," in part because the Internal Revenue Service in August 2010 said that it would no longer provide "information concerning a taxpayer's obligations to the IRS or certain others which might preclude payment of a tax refund." The FDIC's position is that without this key information provided by the IRS, the bank's seasonal tax refund anticipation loans -- which the FDIC said totaled "$3,011,606,947, roughly equal to the average assets of the Bank" during the 2010 tax season -- "the risk of loss increases and a robust underwriting risk mitigation process becomes essential," and that Republic Bank and Trust's was using "deficient credit underwriting process."
The bank in February filed a complaint the United States District Court for the Western District of Kentucky against the FDIC, saying the regulator's actions to try to prohibit Republic's refund anticipation lending had not been done "in a fashion permitted by law," and that the regulator had "unlawfully ignored its own rules." A hearing is scheduled for Feb. 6, 2012, according to SNL, with the FDIC amending its previous notice to include a $2 million fine.
SNL reported that the bank's refund anticipation loans made through its agreement with
Liberty Tax Service
during the 2011 tax season declined to $1.6 billion, from $3.2 billion made during the 2010 tax season. Republic Bancorp reported that during the first six months of 2011, net income from its Tax Refund Solutions segment increased to $70.3 million -- "or approximately 88% of the Company's total net income" -- from $45.6 million a year earlier, despite the drop in loan volume, because of increased pricing "to mitigate the anticipated increase in provision for loan losses" for the refund anticipation loans, because of the reduction in information available from the IRS.
Since Republic's tax refund-related businesses -- which also include electronic refund checks and electronic refund deposits - are seasonal, the Tax Refund Solutions segment generally operates at a loss during the second half of the year.
Quite a bit is riding on the February hearing, and Republic Bancorp could be facing quite a significant change in its business model.
Keeping in mind that the company's revenues are seasonal in nature, year-to-date earnings for the first three quarters were $88.0 million, or $4.20 per class A share, increasing from $60.4 million, or $2.90 per Class A share, a year earlier.
The company was very strongly capitalized, with a tangible common equity ratio of 14.35% as of Sept. 30, according to SNL.
Hilliard Lyons analyst Ross Demmerle has a neutral rating on the shares, but said in an October report that he believed Republic Bancorp's dividend was "secure," because "even under the worst case scenario, complete elimination of Tax Refund Solutions, the payout ratio would be less than 50%." The analyst also said that a "focus on traditional banking might be a boost for the stock," since the "absence of TRS would likely remove" the FDIC order and associated headline risk, and "could allow for the pursuit of potentially accretive bank acquisitions.
The shares trade for just 4.7 times the consensus 2012 EPS estimate of $4.45 among analysts polled by FactSet, and right at tangible book value, according to SNL Financial.
Both analysts covering Republic Bancorp have neutral ratings on the shares.
Written by Philip van Doorn in Jupiter, Fla.
To contact the writer, click here:
To follow the writer on Twitter, go to
To submit a news tip, send an email to:
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.