NEW YORK ( TheStreet) -- The credit crisis has changed the way analysts perceive bank stocks, and industry numbers back-up the general feeling that by "getting back to basics" the sector is setting itself up for a long healthy period. Gone are the heady days of determining if a bank stock was simply overpriced relative to peers or earnings projections. Today, measures such as normalized earnings, tangible common equity and the Texas Ratio have come to the fore as investor as analysts consider a difficult landscape.
Analysts are using price to "normalized" earnings, or the earnings expected for a bank or thrift holding company once it emerges from the credit crisis, as a major component of their stock valuations. John Rodis of Howe Barnes Hoefer & Arnett told TheStreet that the real trick is determining "when is normal going to occur?" He added, "clearly with all the issues out there, normal continues to be pushed out. Then again what is normal?" That's a good question, especially in light of the weak loan demand and the increased regulatory burdens that have yet to unfold following already strict new rules covering credit card disclosures and fees and ATM and debit card overdraft fees. Over the next year, the industry will fight many battles as the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency translate the banking reform legislation into workable regulations. Out of the 21 bank holding companies he covers, mainly in the Midwest, Rodis has buy ratings on just six, most recently upgrading Enterprise Financial Services ( EFSC of St. Louis and Southwest Bancorp ( OKSB ( OKSB of Stillwater, Okla., saying that recent pullbacks presented buying opportunities for both.
Among the largest 10 U.S. bank and thrift holding companies by total assets as of June 30, seven had tangible common equity ratios below 7%, however, all but Capital One ( COF - Get Report) had significantly higher tangible common equity ratios than they did at the end of 2007. Among this group, the companies with the highest tangible equity levels were Wells Fargo ( WFC - Get Report), which had a tangible common equity ratio of 7.14%, PNC Financial ( PNC - Get Report), which had a ratio of 8.64% and SunTrust ( STI - Get Report) which had, by far, the highest tangible common equity ratio among the group, at 10.08%. For SunTrust, the high level of tangible common equity is a good thing since the Atlanta lender still owes $4.85 billion in TARP money - the only bank holding company among the largest ten with this distinction. SunTrust also had the highest nonperforming assets ratio among the group, at 4.53% as of June 30. For this set of data, SNL defines nonperforming assets as nonaccrual loans (less government-guaranteed balances), restructured loans and repossessed assets. FIG Partners analyst Christopher Marinac has a neutral rating on SunTrust and said in an August 10 report that his earnings projections for the company "include $ 1 billion of new common equity to permit STI to repay TARP by early 2011."
The largest U.S. holding company with a Texas ratio above 50% as of June 30 was SunTrust at 53.89%. The second largest was BB&T ( BBT - Get Report), which had a 50.69% ratio of nonperforming assets to tangible common equity and reserves.
Finally, Rodis added that as a result of the crisis, when loan demand eventually increases, community and regional banks will be more prudent in their commercial real estate loan underwriting, focusing more on owner-occupied properties and less on the speculative projects that wounded so many lenders -- Written by Philip van Doorn in Jupiter, Fla. >To contact the writer of this article, click here: Philip van Doorn. To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn. >To submit a news tip, send an email to: firstname.lastname@example.org