NEW YORK (
) -- Although banking sector investors have taken it on the chin so far this year, analysts see tremendous upside for many familiar names.
KBW Bank Index
was down 3% year-to-date through Friday's market close, giving up 10% for the 52-week period. Meanwhile, the
S&P 500 Index
( SPX.X) was up 6% year-to-date, and 16% for one year.
"The worst part of this dismal relative performance is that the major banks are producing earnings that have largely met or exceeded Wall Street's expectations," says Nancy Bush, a contributing editor with SNL Financial, who added that the large banks "are beginning (just) to show some incipient signs of loan growth."
The "big four" of
Bank of America
have been trading at single-digit multiples to forward earnings estimates for quite some time, as the group faces what can seem to be a daily onslaught. Regulators are implementing new rules and keeping a tight hand on dividends and stock buybacks as the industry continues negotiating with federal regulators and state attorneys general over mortgage servicing and foreclosure practices.
The largest names also have seen year-over-year
from weak loan demand and declines in credit card fee income and checking account overdraft fees, brought about mainly by regulatory changes springing from the CARD act of 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Obama last July
The largest bank names have also seen year-over-year declines in their net interest margins, with a continued environment of very low interest rates and weak loan demand.
Despite the challenges, analysts still see hope for many banks, with it being pretty obvious that patience will be required.
To come up with our list of 10 actively traded bank stocks with significant upside potential, we began with publicly traded bank and thrift holdings companies -- excluding those traded on the Pink Sheets -- with average daily trading volume of over 50,000 shares, then isolated the 10 with the greatest upside potential, based on the mean price targets among analysts polled by FactSet. We pared the list further, by only including names with at least two "buy" recommendations from analysts.
All data was provided by SNL Financial. Most of the listed names posted weak first-quarter earnings, with the smaller banks still suffering elevated credit costs.
Here are the
, ranked by ascending upside potential:
10. Wells Fargo
Wells Fargo's shares closed at $27.93 Friday, down 9% year-to-date. Based on the mean price target of $36.78 among analysts polled by FactSet, the shares have 32% upside potential.
The company reported first-quarter net income of $3.6 billion, or 67 cents a share, increasing from $2.5 billion, or 45 cents a share, in the first quarter of 2010. Earnings received a big boost as the provision for credit losses declined to $2.2 billion in the first quarter from $5.3 billion a year earlier, but this was partially offset by a decline in noninterest income and an increase in expenses.
Wells Fargo's earnings in the first quarter benefitted from a $1 billion release of loan loss reserves. According to SNL Financial, the company's pre-provision net revenue declined to $8 billion in the first quarter, from $9.8 billion a year earlier.
Wells Fargo, along with Bank of America, JPMorgan Chase and Citigroup, is facing a coming settlement with federal and state regulators, who are investigating the companies' mortgage servicing and foreclosure practices.
Wells Fargo's shares are trading for 8 times the 2012 consensus earnings estimate of $3.48 among analysts polled by FactSet.
Among 25 analysts covering the company, 15 rate the shares a buy, while eight have neutral ratings and two recommend selling the shares.
Marty Mosby of Guggenheim Securities said on May 9 that Wells Fargo is one of his firm's "two favorite picks," rating the company a buy, with a $40 price target.
Richard Staite of Atlantic Equities also rates the shares a buy, with a $38 price target saying in April after the company announced its first-quarter results that he expected "2013 EPS to double over 2010," and that "the key drivers will be a drop in abnormal costs which we estimate were running at $1.7bn in Q1, and a 8% decline in the share count due to repurchase activity."
9. Wilshire Bancorp
of Los Angeles closed at $3.20 Friday, down 58% year-to-date. Based on the mean target price of $4.23, the shares have 32% upside potential.
The company owes $62.2 million in bailout funds received through the Troubled Assets Relief Program, or TARP.
The stock's performance this year reflects a company in transition.
During the first quarter, the company concluded an "extensive" internal investigation, with outside assistance, which "included loan related activities and other matters involving improper activities of a certain loan officer," who is no longer employed by the company, according to Wilshire Bancorp's 2010 10-K filing with the
Securities and Exchange Commission
The "lack of supervision and oversight by management, and the deficiencies in loan underwriting, approvals, renewals and asset sales" discovered in the investigation, "reduced
fourth-quarter net income of the Company by $10.3 million," and also contributed to a first-quarter net loss.
Following the investigation, CEO Joanne Kim resigned, and was immediately replaced by Jae Whan Yoo.
On May 11, the company's shares declined 9%, after the company priced a $100 million public offering of common shares at $2.75 a share. The offering followed a May 6 memorandum of understanding with the
Federal Deposit Insurance Corp.
and state regulators, under which main subsidiary
Wilshire State Bank
agreed to maintain a Tier 1 leverage ratio of at least 10%. The bank subsidiary's Tier 1 leverage ratio was 8.08% as of March 31.
The regulatory agreement also required the bank to reduce its nonperforming loan exposure, improve its credit administration and implement a liquidity plan, among other requirements.
The holding company reported a first-quarter net loss to common shareholders of $52.1 million, or $1.77 a share, compared to net income to common shareholders of $2.4 million, or 8 cents a share, in the first quarter of 2010. The main factor in the first-quarter loss was $38.1 million in tax expenses, as the company wrote-down deferred tax assets.
The first-quarter provision for loan losses was $44.8 million, more than double the $17 million a year earlier, but declining from $83.6 million in the fourth quarter. During the first quarter, the company took write-downs on $94 million in portfolio loans that reclassified as held-for-sale.
Nonperforming assets -- including nonaccrual loans and repossessed assets -- made up 3.18% of total assets as of March 31, increasing from 2.90% the previous quarter, but matching the same ratio a year earlier. The annualized ratio of net charge-offs to average loans for the first quarter was 1.84%, while loan loss reserves covered 5.02% of gross loans as of March 31.
Wilshire Bancorp's shares are trading for 5 times the consensus 2012 earnings estimate of 59 cents a share.
Out of seven analysts covering Wilshire Bancorp, three rate the shares a buy, while the remaining analysts all have neutral ratings.
Joe Gladue of B. Riley has a buy rating on the shares with a $6 price target, estimating earnings of $1.08 a share for 2012 and saying in a report published after Wilshire's announcement of its first-quarter results that his firm anticipated "aggressive actions to cleanse the balance sheet by new management over the next few quarters, resulting in lower near-term earnings, but positioning the bank for better results in 2012."
Operational improvements noted by Gladue included an expanding net interest margin and increase noninterest income, as the company's SBA loan originations increased. Meanwhile, noninterest expenses declined, as the company's maintenance costs for repossessed real estate declined, and it reduced headcount.
Timothy Coffey of FIG Partners upgraded the shares to a buy rating on Tuesday, with a $3.65 price target, saying "As the company produces sustainable levels of profitability (greater than nominal amounts) and charge-offs start to decline, the company is likely to reverse
the $38.1 million valuation allowance on Deferred Tax Assets." Coffey says this reversal is likely to take place in 2013, but "should results in 2011 be better than expected,
the reversal could occur as early as second half of 2012."
8. Oriental Financial Group
Oriental Financial Group
of San Juan, Puerto Rico, closed at $11.80 Friday, down 5% year-to-date. Based on the mean target price of $15.63, the shares have 32% upside potential.
First-quarter net income to common shareholders was $1.9 million, or 4 cents a share, compared to $10.7 million, or 42 cents a share, during the first quarter of 2010. The earnings decline mainly reflected $5.4 million in tax expenses "for the re-measurement of
the company's deferred tax asset," as well as a $4 million loss on derivatives, resulting from "the strategic decision to sell the Company's former forward-settled swaps and purchase new swaps."
On a pre-tax basis, Oriental Financial's first-quarter operating income totaled $13.1 million, increasing 5% year-over-year.
On May 6, KBW analyst Derek Hewett reiterated his "outperform" or buy rating on the shares, saying that Oriental's "credit quality looks good and capital is likely the highest on the island," and that "Given its excess capital levels, the company has the ability to repurchase a significant amount of its shares." Hewett's target price for the shares is $16.00.
Oriential's shares are trading for 8 times the consensus 2012 earnings estimate of $5.37 a share.
Three out of four analysts covering Oriental Financial Group rate the shares a buy. The remaining analyst has a neutral rating.
Citigroup's shares closed at $41.53 Friday, down 12% year-to-date. Based on the mean target price of $55.74, the shares have 34% upside potential.
The shares underwent a 1-for-10 reverse split after the market close on May 6, and have been sliding, as would be expected immediately following this type of action.
First-quarter net income was $3 billion, or a dollar a share (adjusting for the reverse split), down from $4.4 billion, or $1.50 a share, in the first quarter of 2010. While first-quarter earnings were boosted by a $3.3 billion reserve release, results were down from a year earlier because of revenue declines, with lower net interest income as loan balances declined, and lower revenue from the company's Securities and Banking division.
Earlier this month, Rochdale Securities analyst Richard Bove told
that he expected
, although he was less than thrilled with management's decision to conduct the reverse split.
Out of 21 analysts covering Citigroup, 13 rate the shares a buy, six have neutral ratings and two recommend selling the shares.
of Chevy Chase, Md., closed at $6.20 Friday, down 13% year-to-date. Based on the mean target price of $8.35, the shares have 35% upside potential.
The company had $9.3 billion in total assets as of March 31, lending to small and middle market businesses nationally, while operating a 21-branch network in southern and central California.
First-quarter net income was $3.2 million, or a penny a share, compared to a loss of $211.7 million, or 66 cents a share in the first quarter of 2010. The improved bottom line mainly reflected a reduction in the provision for loan losses to $44.8 million in the first quarter from $218.9 million a year earlier.
, Capital Source had the best year-over-year increasing in pre-provision net revenue, of 86%, with $23.5 million in gains on investments during the first quarter, compared to $7.8 million a year earlier, as well as a decline in expenses on repossessed real estate of nearly 50%, to $10.2 million.
CapitalSource's shares are trading for 12 times the consensus 2012 earnings estimate of 50 cents a share.
Out of 13 analysts covering CapitalSource, nine rate the shares a buy, while the remaining analysts all have neutral ratings.
5. Park Sterling Corp.
Park Sterling Corp.
of Charlotte, N.C., closed at $4.99 Friday, down 19% year-to-date. Based on the mean target price of $6.92, the shares have 39% upside potential.
The company had $628 million in total assets as of March 31, and is in the midst of a major expansion, after raising $150 million in common equity last August
On March 31, the company announced an agreement to acquire
Community Capital Corp.
( CPBK) of Greenwood, S.C., for $32.4 million in cash and stock. Community Capital had $649 million in total assets as of March 31, with 18 branches located throughout South Carolina. The merger is expected to be completed during the third quarter.
Park Sterling's CEO James Cherry said when the deal was announced that the combined company would "work together to build an $8 to $10 billion community banking franchise in the Carolinas and Virginia."
Park Sterling posted a first-quarter net loss of $2.9 million, or 10 cents a share, compared to net income of $1578 thousand, or 3 cents a share, a year earlier. Earnings continued to drag as the company worked through its problem loans. The first-quarter provision for loan losses was $4.5 million, rising from $1.5 million in the first quarter of 2010, but declining from a peak of $8.2 million in the fourth quarter.
The consensus among analysts polled by FactSet is for Park Sterling to post a net loss of 30 cents a share for all of 2011, followed by a loss of 7 cents a share in 2012.
All three analysts covering Park Sterling Corp. rate the shares a buy.
4. CenterState Banks
of Davenport, Fla., closed at $5.69 Friday, down 28% year-to-date. Based on the mean target price of $8.00, the shares have 41% upside potential.
CenterState had $2.2 billion in total assets and 53 offices in central Florida as of March 31, growing its balance sheet 25% from a year earlier, as the company acquired three failed Florida banks, including
of Aventura last July, and Independent National Bank of Ocala and Community National Bank of Bartow,
CenterState reported first-quarter net income of $165 thousand, or a penny a share, mainly resulting from a bargain purchase gain of $11.1 million, from the purchase of four branches from
. A year earlier, the company earned $393 thousand, or 2 cents a share. The first-quarter bargain purchase gain was more than offset by a provision for loan losses of $11.3 million, compared to a provision of $4.1 million a year earlier.
The consensus among analysts is for the company to report a full-year loss of 26 cents a share during 2011, followed by earnings of 14 cents a share in 2012.
Out of eight analysts covering CenterState Banks, three rate the shares a buy, while the remaining analysts all have neutral ratings.
On April 28, KBW analyst Brady Gailey upgraded the shares to an "outperform" or buy rating with an $8 price target.
3. Bank of America
Bank of America's shares closed at $11.93 Friday, down 11% year-to-date. Based on the mean target price of $17.14, the shares have 44% upside potential.
As the nation's largest bank holding company, with a leading mortgage servicing position from its acquisition of Countrywide in 2008, Bank of America is at the forefront of the continued political and regulatory onslaught against the mortgage industry. The company faces plenty of financial and headline risk over the short term, with coming settlements with federal regulators over loan servicing and foreclosure procedures, and another settlement with states attorneys general, over the foreclosure mess.
Bank of America reported first-quarter net income of $2.1 billion, or 17 cents a share, compared to $3.2 billion, or 28 cents a share, a year earlier. First-quarter results were boosted by a $2 billion release of loan loss reserves, however, this was more than offset by a decline in mortgage banking income and increases in mortgage-related and legal expenses.
The company also reported that as of March 31, outstanding mortgage claims by counterparties totaled $13.6 billion, rising from $10.7 billion the previous quarter.
Nancy Bush, an independent bank analyst and contributing editor for SNL Financial, told
that Bank of America's first-quarter results included $3 billion in mortgage assessments and waivers, adding that with "an estimate of $7 to $10 billion for their possible additional liability and the repurchase mess," it could take an additional five years for the company's mortgage problems to play out. "The worst of this whole thing will happen for the large banks through the first half of 2012, so we have roughly another year of substantial expenses relating to the resolution of the housing crisis," Bush said.
Earlier this month, Rochdale analyst Richard Bove said he didn't "see any reason why Bank of America is not going to double from the current price," also saying he expected most of the mortgage problems to be addressed over the next twelve months.
Bank of America's shares are trading at a very low 7 times the consensus 2012 earnings estimate of $1.71 a share.
Out of 26 analysts covering Bank of America, 14 rate the shares a buy, while the remaining analysts all have neutral ratings.
2. Popular, Inc.
Shares of Popular, Inc. of Hato Rey, Puerto Rico, closed at $2.98 Friday, down 5% year-to-date. Based on the mean target price of $4.40, the shares have 48% upside potential.
The company owes $935 million in TARP money, having converted the preferred shares held by the Treasury to trust-preferred shares in the third quarter of 2009.
First-quarter net income to applicable to common stock was $9.2 million, or a penny a share, compared to a loss of $85.1 million, or 13 cents a share, in the first quarter of 2010. The provision for loan losses declined to $75.3 million, from $240.2 million a year earlier.
Pre-provision net revenue for the first quarter was $232.7 million according to SNL, increasing 41% from a year earlier, mainly because of the expansion from the purchase of the failed Westernbank from the FDIC last May, which strengthened Popular's leading position in its home market.
Popular's shares trade for 8.5 times the consensus 2012 earnings estimate of 35 cents a share.
Four of the five analysts covering Popular rate the shares a buy. The remaining analyst has a neutral rating.
1. Citizens Republic Bancorp
Citizens Republic Bancorp
( CRBC) of Flint, Mich., closed at 79 cents Friday, up 29% year-to-date. Based on the mean target price of $1.23, the shares have 55% upside potential.
The company had $9.7 billion in total assets as of March 31, a 17% reduction from the previous year, and owes $300 million in TARP money, having deferred its last five quarterly dividend payments to the government.
Citizens Republic posted a first-quarter net loss to common shareholders of $74.3 million, or 19 cents a share, compared to a loss of $90.3 million, or 21 cents a share, in the first quarter of 2010. The first-quarter provision for loans losses was $88.7 million, declining from $101.4 million a year earlier.
CEO Cathleen Nash said the company had substantially completed its "accelerated plan to resolve problem assets that we announced last October," through which Citizens Republic reduced its level of nonperforming assets by 58% over the course of two quarters.
Nonperforming assets totaled $188 million as of March 31, declining 34% from the previous quarter, and 66% from a year earlier. The ratio of nonperforming assets to total assets was 1.93%. The company charged-off $161 million in problem loans during the first quarter.
The shares trade for 7 times the consensus 2012 earnings estimate of 11 cents a share.
The four analysts covering Citizens Republic are evenly split between buy and hold ratings.
On May 2, Oppenheimer analyst Terry McEvoy reiterated his "outperform" or buy rating on the shares, with a $1.40 price target, saying his firm believes "the company's returning to consistent profitability" during the second half of 2011.
>>To see these stocks in action, visit the
portfolio on Stockpickr.
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.