NEW YORK (
) -- In the midst of a bank stock rally of historical proportions, where do investors look for long-term bargains?
During the aftermath of the credit crisis -- with so many bank and thrift holding companies seeing continual pressure to earnings from loan losses and related costs -- investors and analysts have focused on price-to-book-value ratios, as an easy way of comparison.
At this point, with so many banks turning a profit, price-to-book is still useful when looking for bargains, but investors should also consider price multiples to earnings.
FIG Partners analyst John Rodis says investors should look at price multiples to 2013 earnings estimates, "because things are certainly better this year, and by 2013 you're going to have a good read on things."
Rodis says that "for better or worse, the group has been pretty strong so far this year, and the group has momentum, but on a valuation basis, for the better quality names, it is hard to justify much higher levels," adding that "it also seems that there's new money coming into the group, from institutions that were sitting on the sidelines."
According to the analyst, "prices tend to overshoot," both on the downside, and now on the upside.
Keeping in mind that most sell-side analysts focus on 12-month outlooks in their price targets, long-term investors could be well-served by focusing on the banks trading cheapest to their consensus 2013 earnings estimates.
To come up with our list, we used data supplied by HighlineFI to isolate bank and thrift stocks for which consensus 2013 earnings estimates among analysts polled by Thomson Reuters were available. We limited the group to names with average daily trading volume of at least 40,000 shares.
The list we came up with may surprise you, since it features many of the best-known U.S. banking names.
Here are the
trading cheapest to consensus 2013 earnings estimates, ordered by descending forward price-to-earnings ratios:
5. JPMorgan Chase
closed at $45.00 Monday, returning 36% year-to-date, following a 20% decline during 2011.
The shares trade for just over eight times the consensus 2013 earnings estimate of $5.51 a share, among analysts polled by Thomson Reuters.
JPMorgan's shares trade for 1.4 times tangible book value, according to HighlineFI.
Following the completion of the
annual bank stress tests last Tuesday, JPMorgan announced that it would increase its quarterly dividend by a nickel to 30 cents, and that its board of directors had authorized a $15 billion stock buyback program.
Up to $12 billion in buybacks may take place during 2012, with the remaining $3 billion authorized for the first quarter of 2013.
Based on the increased quarterly payout, the shares have a dividend yield of 2.67%.
Bank of America Merrill Lynch analyst Guy Moszkowski rates JPM a "Buy," with a $46 price objective, and said that the company's total payout was "75% better than anticipated," since the analyst had expected, and implied a "total payout ratio of ~75% of 2012E earnings, vs. our expectation of 50%."
Moszkowski estimates JPMorgan Chase will earn $4.59 a share during 2011, followed by 2013 EPS of $4.94.
Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.
4. Bank of America
Bank of America
closed at $9.53 Monday, for a remarkable year-to-date return of 72%, following last year's 58% drop. With such extreme number's, it's important to point out that the 12-month return for the shares has been a negative 32%.
The shares trade for eight times the consensus 2013 EPS estimate of $1.19, and for 0.8 times tangible book value.
While Bank of America's capital plan submitted to the Federal Reserve for the stress tests didn't include an increased return of capital to investors through higher dividends or share buybacks, the company's passing grade on the stress tests was quite a catalyst for the shares, which went up 19% for the week, through Monday's close.
Following the Fed's stress test results announcement, Citigroup analyst Keith Horowitz said that Bank of America "was a relative winner, given stressed capital levels did not look materially weaker than peers, as some may have expected," and showed "reduced tail-risk of a required capital raise given its capital ratio bottomed at 5.7%
under the Fed's adverse economic scenario used for the stress tests which was not far different than peers and would expect investor sentiment to start to bake in expectations for modest capital return starting in 2013."
Horowitz has a neutral rating on Bank of America, with an $8.50 price target, estimating the company will earn 50 cents a share this year, followed by 2013 EPS of 70 cents.
Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.
3. Capital One Financial
Capital One Financial
closed at $55.10 Monday, returning 30% year-to-date, following a flat return during 2011.
The shares trade for just under eight times the consensus 2013 EPS estimate of seven dollars, and for 1.6 times tangible book value.
Jefferies analyst Daniel Furtado on Monday upgraded Capital One Financial to a "Buy" rating, while raising his price target for the shares by 44% to $72.00.
The analyst said that with its acquisition of ING Direct complete, with regulatory approval of the pending purchase of
$30 billion U.S. card portfolio for a $2.6 billion premium having been received, and with last week's $1.25 billion common equity raise, "much of the downside risk to COF shares has been removed."
Furtado estimates that Capital One will earn $5.71 a share during 2012, followed by 2013 EPS of $7.16, with earnings results "likely to be choppy over the next few quarters as integration and acquisition expenses are recognized, and the accounting adjustments for the recent acquisitions are more well known."
Interested in more on Capital One Financial? See TheStreet Ratings' report card for this stock.
closed at $37.17 Monday, returning 41% year-to-date, following a 44% drop during 2011. The 12-month return for the shares is a negative 16%.
The shares trade for just under eight times the consensus 2013 EPS estimate of $4.78, and for 0.8 times tangible book value.
Citigroup's plan to increase its return of capital to investors this year, through an increased dividend and share buybacks, was rejected by the Federal Reserve.
The Federal Reserve's 2012 stress tests were based on a harsh economic scenario, with real U.S. GDP contracting "sharply through late 2012, with the unemployment rate reaching a peak of just over 13 percent in mid-2013," while also assuming "that U.S. equity prices fall by 50 percent from their Q3 2011 values through late 2012 and that U.S. house prices fall by more than 20% through the end of 2013." In addition, under the Fed's adverse scenario, "foreign real GDP growth is also assumed to contract, with growth slowdowns in Europe and Asia in 2012."
In order to pass the stress tests, the results had to show that the group of 19's estimated Tier 1 common equity ratios would remain over 5% under the adverse economic scenario.
In order to have their capital plans approved, the companies' estimated Tier 1 capital ratios at the end of 2013 would have to be above 5%, "with all proposed capital actions through Q4 2013."
According to the Fed's revised stress test results, Citi would see $19.6 billion in loan losses through the end of 2013, with a Tier 1 common equity ratio of 5.9%, falling to 4.9% at the end of 2013 if the company were to follow through with its submitted, and rejected, capital plan.
Investors might still see an increased return of capital from Citi this year, as the company announced last Tuesday that it would "submit a revised Capital Plan to the Federal Reserve later this year, as required by the applicable regulations."
Morgan Stanley analyst Betsy Graseck has a neutral rating on Citigroup and on Sunday raised her 2012 EPS estimate to $3.67 from $3.34, and her 2013 EPS estimate to $4.40 from $4.15, while raising her price target for the shares to $42 from $30.
Graseck said she expected "Citi to resubmit their capital plan in 1h12 and begin returning capital in 2h12," in "more meaningful amounts" than the current one-cent quarterly dividend, and through an estimated $1.5 billion in share buybacks during 2012.
Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.
1. Doral Financial
of San Juan, Puerto Rico, closed at $1.47 Monday, returning 54% year-to-date, following a 31% decline during 2011. The 12-month return for the shares has been 27%.
Doral's shares are heavily discounted, trading for just three times the consensus 2013 EPS estimate of 49 cents, and for half their tangible book value.
Doral had $1.9 billion in total assets as of Dec. 30 and reported fourth-quarter net income attributable to common shareholders of $9.2 million, or seven cents a share, compared to a loss of $38.5 million, or 30 cents a share, in the fourth quarter of 2010. The fourth-quarter profit included an $8.6 million income tax benefit.
The company's credit costs declined during the fourth quarter, but Doral was still saddled with nonperforming assets making up 9.62% of total assets as of Dec. 30, improving slightly from 9.86% a year earlier.
When asked during the company's fourth-quarter conference call how much in remaining deferred tax assets investors might look forward to recapturing, Doral CFO Bob Wahlman said that the DTA recapture was related to the performance of two of the company's Puerto Rico subsidiaries, which under the territory's law, file their tax returns independently. Depending on the performance of these subsidiaries, there may be additional tax benefit's boosting Doral's bottom line, but the CFO couldn't provide an estimate.
B. Riley analyst Joe Gladue rates Doral a "Buy," with a $3.75 price target, and said on Jan. 23 that the deferred tax valuation allowance "could add roughly $2.78 to tangible book value if it can be taken back onto the balance sheet," and that the company "took a big step forward" during the fourth quarter, and that if and when the company reaches its goal of sustained profitability, "should not only boost tangible book value, but the stock multiple as well."
Interested in more on Doral Financial? See TheStreet Ratings' report card for this stock.
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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.