NEW YORK (
) -- FBR analyst Paul Miller said Monday that "mortgage banking will continue to be a dominant earnings driver through the end of 2012," and that the banking industry's first-quarter results "support the rally" in stock prices.
With "roughly 75% of the banking industry by assets having reported 1Q results," Miller expects the bank stock rally to continue, "as this quarter's solid earnings results, with the expectation of more to come, justify current valuations."
President Obama's expansion of the Home Affordable Refinance Program, or HARP 2, which allows borrowers with mortgage loans held by
to refinance their entire loan balances at today's low rates, no matter how much the value of the underlying home has dropped, has "yet to make a significant impact on the system," according to Miller.
Underlining the potential for growing mortgage originations to boost earnings this year, Miller said that "this quarter, mortgage banks reported some of the highest gain-on-sale margins we have seen in years," as the lenders quickly sell newly originated loans to the government-sponsored mortgage enterprises. Regional lenders are not only benefiting from HARP 2, they are absorbing business given up by
Bank of America
, which have been "significantly pulling back on correspondent lending, which decreased origination capacity."
Miller said that loan growth has been generally weak, with total loan balances growing "only 0.5% (sequentially) on average, aided by continued expansion in
commercial and industrial and residential mortgage portfolios," with regional banks having the best growth prospects.
With the largest banks continuing "to trade at a discount to small- and mid-cap peers, even after having cut the valuation gap in half (on a
tangible book value basis) since the beginning of the year," FBR said, "there is more room to run for the larger banks, as investors further appreciate a strengthening economy, potential regulatory reform, and the large caps' diversified revenue streams."
FBR "continues to encourage investors to put money into" the following three large banks and also notes "company-specific opportunities" for three regional banks, also listed below:
closed at $33 Friday, up 21% year to date, following a 10% decline in 2011.
The shares trade for twice their tangible book value, according to HighlineFI, and for nine times the consensus 2013 earnings estimate of $3.67 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $3.26.
Based on a quarterly payout of 22 cents, the shares have a dividend yield of 2.67%.
Wells Fargo reported
of $4.2 billion, or a record 75 cents a share, beating the consensus EPS of 73 cents. The company reported a 21% quarter-over-quarter increase in mortgage banking revenue, to $2.9 billion, supporting total revenue of $21.6 billion, which exceeded the consensus estimate of $20.5 billion.
Following a robust $129 billion in first-quarter mortgage loan originations, Chief Financial Officer Tim Sloan indicated that Wells Fargo would also have a strong second quarter for mortgage volume, saying that "the unclosed mortgage pipeline was solid at $79 billion at quarter-end."
Wells Fargo reported total first-quarter noninterest expenses of $13 billion, increasing from $12.5 billion in the fourth quarter, and $12.7 billion during the first quarter of 2011. Sloan said that the company expects "a $500-$700 million overall reduction in noninterest expense during the second quarter."
Miller rated Wells Fargo outperform with a $39 price target, and said on April 16 after the company reported its first-quarter results that "earnings quality was somewhat disappointing as expenses were higher than expected and management guided toward a higher run-rate, overall loan growth was nonexistent, and the
net interest margin was supported by growth in trading assets and securities."
On a more positive note, Miller said that "operating revenue grew again in the quarter as the company recognized strong mortgage banking earnings," and that "Wells Fargo continued to gain market share, resulting in higher origination volumes, and the gain-on-sale margin rose, driving a $500 million increase in mortgage banking fees."
Miller estimated that Wells Fargo will earn $3.12 a share for all of 2012, followed by 2013 EPS of $3.65.
Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.
closed at $42.72 Friday, returning 30% year to date, following a 20% decline in 2011.
The shares trade for 1.3 times tangible book value and for eight times the consensus 2013 earnings estimate of $5.59 a share. The consensus 2012 EPS estimate is $4.96.
Based on a quarterly payout of 30 cents, the shares have a dividend yield of 2.81%.
JPMorgan reported first-quarter earnings on a managed basis of $5.38 billion, or $1.31 a share, soundly beating the consensus estimate of $1.18. The bank saw a strong recovery in trading revenue, to $4.66 billion in the first quarter, compared to $2.49 billion during a very difficult fourth quarter. Trading revenue was still down 8% year over year.
JPMorgan also reported very strong first-quarter mortgage revenue of $2.01 billion, up from $725 million in the fourth quarter and a loss of $487 million during the first quarter of 2011.
Miller rated JPMorgan outperform with a $50 price target, and said on April 16 that the company's first-quarter results were "relatively in line with expectations given the tailwinds from noninterest income and slow loan growth in what is seasonally the weakest quarter," adding that "the dramatically higher principal transactions net revenue was a welcome development given the poor results we have seen the past two quarters."
Miller also said that "overall, the core business lines continue to produce decent results while we deal with sluggish economic growth, and the company remains one of the best positioned to take advantage of a more robust recovery once the fog clears."
FBR estimated that JPMorgan Chase will earn $4.83 a share this year, followed by 2013 EPS of $5.70.
Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.
PNC Financial Services Group
PNC Financial Services
of Pittsburgh closed at $65.38 on Friday, returning 13.4% year to date, following last year's 3% pullback.
The shares trade for 1.4 times tangible book value and for nine times the consensus 2013 earnings estimate of $6.88 a share. The consensus 2012 EPS estimate is $6.16.
Based on a quarterly payout of 40 cents, the shares have a dividend yield of 2.48%.
PNC on Wednesday reported
of $811 million, or $1.44 a share, compared to $493 million, or 85 cents, during the fourth quarter of 2011. The bank reported a profit of $832 million, or $1.57 a share, during the first quarter of 2011.
The first-quarter results came in a penny ahead of the consensus estimate.
PNC's first-quarter mortgage revenue increased 18% year over year to $230 million.
Miller on Wednesday reiterated his outperform rating for PNC, with a $68 price target, saying the company "reported strong operating earnings as the company experienced asset growth and realized higher-than-expected mortgage banking and asset management revenue."
However, the "real story this quarter," according to Miller, "is that management raised its earnings outlook,"and that "considering management's expectations for high-single-digit revenue and net interest income growth as well as declining credit costs, we believe that earnings estimates are too low across the Street."
FBR estimated that PNC will earn $6.65 a share this year, followed by 2013 EPS of $7.40.
Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.
Fifth Third Bancorp
Fifth Third Bancorp
of Cincinnati closed at $13.95 Friday, up 10% year to date, following an 11% decline during 2011.
The shares trade for 1.3 times tangible book value and for nine times the consensus 2013 earnings estimate of $1.54 a share. The consensus 2012 EPS estimate is $1.47.
Based on a quarterly payout of 8 cents, the shares have a dividend yield of 2.29%.
Fifth Third reported
of 45 cents a share, beating the consensus estimate of 36 cents, and followed the industry trend in a big way with mortgage revenue doubling year over year.
However, the first-quarter results included several one-time items, including a $115 million pretax benefit (roughly $75 million, or 8 cents a share, after tax) from gains from the initial public offering of Fifth Third's
subsidiary, a $36 million pretax charge ($23 million, or 2 cents a share, after tax), "from Vantiv debt termination-related charges recorded in equity method earnings," and a "benefit of $46 million pre-tax (approximately $30 million after-tax, or $0.03 per share), from gains on the higher valuation of the warrant Fifth Third holds in Vantiv."
Excluding the above one-time items, first-quarter operating earnings of 36 cents would match the consensus estimate.
Miller on Thursday reiterated his outperform rating for Fifth Third, saying the company's "capital position is well above Basel III requirements and management has been vocal about its intention to return capital to shareholders." After having its previous capital plan rejected in part by the
, the company "recently resubmitted a capital plan to regulators that proposes a dividend hike and share repurchase increase," which Miller believes "could add significant value to shares and will position the company to outperform peers."
Miller's price target for Fifth Third is $18. The analyst said the company's first-quarter results were "encouraging and included improving credit metrics, higher-than-expected mortgage net interest income, decent loan growth,
and impressive mortgage banking revenues."
FBR estimated that Fifth Third will earn $1.42 a share this year, followed by 2013 EPS of $1.55.
Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.
of Waterbury, Conn., closed at $21.44 Friday, returning 5% year to date, following a 4% return during 2011.
The shares trade for 1.4 times tangible book value and for 12 times the consensus 2013 earnings estimate of $1.80 a share. The consensus 2012 EPS estimate is $1.72.
Webster reported first-quarter net income available to common shareholders of $38.3 million, or 42 cents a share, coming in ahead of the consensus estimate of 40 cents. In comparison, the company reported earnings to common shareholders of $39.6 million, or 43 cents a share, the previous quarter, and $33.8 million, or 36 cents a share, a year earlier.
While a sequential increase in expenses caused a slight dip in earnings from the previous quarter, Webster's mortgage banking income increased to $4.4 million during the first quarter, from $1.1 million in the fourth quarter, and $1.3 million in the first quarter of 2011.
FBR analyst Bob Ramsey rated Webster Financial outperform with a $27 price target, and said last Tuesday that first-quarter trends were "generally in line with expectations, with some upside from strong mortgage banking," and that the company "reported positive operating leverage, and its efficiency ratio continued to improve, edging it closer toward its goal of 60% operating efficiency by 4Q12."
Ramsey noted that Webster's management will "request a dividend increase at next week's board meeting, stated that buybacks are 'only a matter of time,' and downplayed the likelihood of M&A."
Webster is currently paying a quarterly dividend of a nickel a share.
FBR estimated the company will earn $1.75 this year, followed by 2013 EPS of $1.95.
Interested in more on Webster Financial? See TheStreet Ratings' report card for this stock.
of New York closed at $64.21 Friday, returning 7% year to date, following a remarkable 20% return during 2011.
The shares trade for 2.1 times tangible book value and for 15 times the consensus 2013 earnings estimate of $4.22 a share. The consensus 2012 EPS estimate is $3.67.
Signature Bank will report its first-quarter earnings on Tuesday before the market opens, with a consensus EPS estimate of 84 cents a share, compared to EPS of 85 cents in the fourth quarter and 82 cents a year earlier.
Ramsey rated Signature Bank outperform with a $75 price target, and in early April said that the bank's "new equipment/ transportation financing subsidiary
is a big positive for the story, and a catalyst for shares to outperform," providing "another avenue for Signature to grow loans and utilize its low cost deposit funding."
Ramsey said that the 30-member equipment financing team that came "largely from All Points Capital (a subsidiary of
)," should "enable Signature to add $100 million of new loans a quarter once fully leveraged, which is significant given its loan growth of approximately $400 million per quarter in 2011."
The analyst called Signature Bank "the best growth story in banking, having grown loans and deposits 31% and 24%, respectively, over the last year."
Ramsey estimated that Signature Bank will post first-quarter EPS of 86 cents, with full-year EPS of $3.70 for 2012 and $4.45 for 2013.
Interested in more on Signature Bank? 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.