5 Buy-Rated Banks With Increased Upside: FBR (Update 1)

Updated with Bank of America's late afternoon stock price and more recent information on the company's efforts to trim assets.

NEW YORK ( TheStreet) -- After a dismal 2011, when most bank stocks saw significant price pullbacks, we're in the midst of a bank rally that may accelerate if the major industry players pass Federal Reserve stress tests with flying colors.

FBR analyst Paul Miller said on Monday that he expected the rally to continue, "given that valuations are still at a discount to what the underlying fundamentals indicate, and we should receive more clarity on the regulatory and political fronts through the year." The analyst added that during the fourth quarter, "banks were able to show decent loan growth in select asset classes."

The KBW Bank Index ( I:BKX) was up 10% year-to-date through Friday's market close, after seeing a 16% decline last year, with all 24 index components seeing positive year-to-date returns, led by Bank of America ( BAC), with a 27% year-to-date return, following a fourth-quarter earnings report that lacked major mortgage-related surprises, while showing a solid increase in capital ratios.

Most analysts covering Bank of America are still on the fence, with significant mortgage putback risk from the company's purchase of Countrywide Financial in 2008. With this year's stress tests being based on particularly severe set of economic assumptions and with the prolonged foreclosure and servicing settlement between the major mortgage servicers, the federal regulators and states' attorneys general likely to be settled soon, 2012 could be the year that investors finally see a clear way forward for Bank of America.

FBR analyst Paul Miller continues to rate Bank of America "Market Perform," with an $8 price target, saying on Friday that "the company reported a weak core operating result, with most major non-interest income drivers down and expenses still at elevated levels," with the sale of assets -- which significantly boosted the company's capital ratios during the fourth quarter -- "likely to have a significant impact on BAC's earnings power over the long term, and set investors up for disappointment when the focus turns from capital adequacy to earnings potential."

Shares of Bank of America were up 3% in later afternoon trading on Monday, to $7.28, after the Daily Telegraph on Saturday reported that Virgin Money Holdings (UK) was "highly likely" to purchase B of A's MBNA Europe subsidiary. The report cited unnamed sources.

Of course, with Bank of America's shares trading at just over half its reported Dec. 31 tangible book value of $12.95, investors could be looking at an opportunity for a quick profit from here, despite the strong return over the past three weeks.

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

The following are five bank holding companies that FBR still rates "Outperform," coming out of earnings season, with analysts raising price targets. We have ordered the group by ascending upside potential, based on FBR's 12 month targets:

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5. Wells Fargo

Shares of Wells Fargo ( WFC) closed at $30.54 Friday, for a year-to-date return of 11%, after a 10% pullback in 2011. Based on a 12-cent quarterly payout, the shares have a dividend yield of 1.57%.

Wells Fargo reported fourth-quarter earnings applicable to common stock of $3.9 billion, or 73 cents a share, increasing 20% year-over-year. Over the past year, the company's operating return on average assets (ROA) has ranged from 1.13% to 1.28%, according to SNL Financial, making it the strongest and most consistent earner among the "big for" domestic bank holding companies, which also included Bank of America, JPMorgan Chase ( JPM), and Citigroup ( C).

FBR analyst Paul Miller last Wednesday raised his price target for Wells Fargo to $33 from $31, "because the company's relatively stable earnings stream, coupled with its strong capital position, should warrant a higher multiple," and lead to "an increase in dividends and buybacks following the publication of the Fed's stress test results in mid March."

At this point in the economic cycle, investors realize that banks will continue to face pressure on their net interest margins, with short-term rates staying near zero and overall loan demand remaining weak. Investors are keying in on banks showing growth of revenue -- which is a tall order with the Durbin Amendment severely cutting debit card interchange revenue beginning in the fourth quarter -- and loan growth.

Miller said that Wells Fargo's "operating revenue grew for the first time in the past year because Wells was able to continue taking market share from competitors on the commercial lending and mortgage origination portions of the business.

The shares trade for 10 times Miller's 2012 earnings estimate of $3.05 a share, which the analyst left unchanged.

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.

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4. PNC Financial Services Group

Shares of PNC Financial Services Group ( PNC)closed at $59.63 Friday, returning 4% year-to-date, after sliding 3% during 2011. Based on a quarterly payout of 35 cents, the shares have a dividend yield of 2.35%.

The Pittsburgh lender reported fourth-quarter net income of $493 million, or 85 cents a share, declining from $826 million, or $1.55 a share in the third quarter, and $798 million, or $150 a share, in the fourth quarter of 2010, mainly because of "$156 million after tax, or $.30 per diluted common share, of residential mortgage foreclosure-related expenses primarily as a result of ongoing governmental matters and a noncash after-tax charge of $129 million, or $.24 per diluted common share, related to redemption of trust preferred securities."

PNC expects to complete its purchase of RBC Bank (USA) from Royal Bank of Canada ( RY) in March, bringing on 400 branches in southern states, and the company has said that it "does not intend to issue any shares of common stock as part of the purchase price" of $3.45 billion.

During the fourth quarter, the company purchased 27 branches in the Atlanta area from Flagstar Bancorp ( FBC).

Please see TheStreet's earnings coverage for regional banks, for additional details on PNC's fourth quarter.

Paul Miller on Thursday raised his price target for PNC to $68 from $60, saying that "the real story behind this earnings release was the guidance management provided surrounding the RBC branch acquisition," and that the expected "mid-high single digit percentage increases in revenue combined with mid-single-digit increases in expenses," should force consensus earnings estimates "rise from their current level near $6.30."

With "material loan growth, continued declines in credit costs, and the Durbin amendment having a smaller impact than initially estimated (a common theme among banks that have reported thus far)," Miller raised his 2012 operating EPS estimate for PNC to $6.80 from $6.20.

PNC's shares trade for nine times Miller's 2012 EPS estimate and for 1.3 times their tangible book value of $44.38, according to SNL Financial.

Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.

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3. U.S Bancorp

Shares of U.S. Bancorp closed ( USB) at $28.74, returning 6% year to date, after returning 2% in 2011. Based on a quarterly payout of 12.5 cents, the shares have a dividend yield of 1.74%.

The Minneapolis lender reported fourth-quarter earnings of $1.35 billion, or 69 cents a share, improving from $1.27 billion, or 64 cents a share, during the third quarter, and $974 million, or 49 cents a share, during the fourth quarter of 2010. The company has been one of the strongest earnings performers among regional banks, with its ROA steadily increasing from 1.30% in the fourth quarter of 2010 to 1.61% in the most recent quarter.

In a report titled "They Make It Look So Easy," Paul Miller on Thursday raised his price target for U.S. Bancorp by a dollar to $33, saying that the fourth quarter "was another strong result where the company continued to take market share from other commercial lender," while continuing to "show considerable improvement in credit metrics while others are starting to see the pace slow."

Miller said that the "results highlight the value of USB's core franchise, and we believe that it further justifies the premium valuation on its shares," and that "conservative stance, USB's diverse platform, and the company's significant C&I and auto lending businesses have positioned USB to thrive in any economic environment."

The analyst raised his 2012 EPS estimate to $2.75 from $2.65.

The shares trade for 2.6 times tangible book value, according to SNL, and for 10.5 times Miller's earnings estimate.

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

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2. Webster Financial

Shares of Webster Financial ( WBS) of Waterbury, Conn., closed at $21.02 Friday, returning 3% year-to-date, after returning 4% in 2011. The company is paying a quarterly dividend of a nickel a share, for a dividend yield of 0.95%.

The company reported fourth-quarter net income available to common shareholders of $39.6 million, or 43 cents a share, compared to $41.4 million, or 45 cents a share, the previous quarter, and $24.3 million, or 29 cents a share, a year earlier. The main factor in the year-over-year bottom line improvement was a reduction in the provision for loan losses to $2.5 million from $15 million.

The company's fourth quarter operating ROA was 0.88%, and the ROA has ranged between 0.72% and 0.94% over the past year, according to SNL Financial.

FBR analyst Bob Ramsey on Thursday raised his price target for Webster to $25 from $22, saying he expected "high single-digit growth for the year" in earning assets, and that "targeted cost saves will drive operating costs lower, to below $120 million/quarter by year-end, providing upside to consensus estimates."

Ramsey noted of Webster's "strong 4Q11 loan growth, including 5.9% sequential growth in commercial non-mortgage and commercial real estate portfolios," and raised his 2012 operating EPS estimate by a nickel, to $1.75.

In discussing the company's earnings conference call, the analyst said that "WBS's top priority is its dividend, and we would expect a modest increase in 2Q12, with a gradual build to a 30% payout ratio," but that share repurchases would likely wait until the end of the year.

Webster Financial's shares trade for 1.4 times tangible book value, according to SNL, and for 12 times Ramsey's 2012 EPS estimate.

Interested in more on Webster Financial? See TheStreet Ratings' report card for this stock.

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1. Fulton Financial

Shares of Fulton Financial ( FULT) of Lancaster, Pa., closed at $9.49 Friday, down 3% year-to-date, following a decline of 3% during 2011. Based on a quarterly payout of six cents, the shares have a dividend yield of 2.53%.

Fulton reported fourth-quarter earnings of $36.1 million, or 18 cents a share, declining from $39.3 million, or 20 cents a share in the third quarter, but improving from $31.5 million, or 16 cents a share, in the fourth quarter of 2010.

The sequential decline mainly reflected a 14% decline in "other service charges and fees" to $10.8 million, as the Durbin Amendment took its toll, while the year-over-year earnings increase reflected securities gains of $3.1 million in , compared to losses of $443,000 in the fourth quarter of 2010.

Fulton Financial's fourth-quarter operating ROA was 0.89%, and according to SNL Financial, the ROA has ranged between 0.77% and 0.98%, over the past five quarters.

Despite "somewhat disappointing results," FBR analyst Bob Ramsey last Wednesday reiterated his "Outperform" rating for Fulton and raised his price target for the shares to $12 from $10, "to reflect stronger industry valuation multiples."

Looking beyond some one-time fourth-quarter items, including "a bulk nonperforming loan sale also added approximately $5 million to credit cost," the analyst said that "Lower-than-expected fee income will have a more lasting impact on future quarters and is the largest contributor to our reduction in 2012 EPS to $0.85 (from $0.90)."

" While 4Q11 results were unexciting, FULT's profitability remains strong (11% return on tangible common equity in 2011), and shares trade at a discount to peers on earnings," he said.

The shares trade for 1.3 times tangible book value, according to SNL, and for 11 times Ramsey's 2012 EPS estimate.

Interested in more on Fulton Financial? See TheStreet Ratings' report card for this stock.

>>To see these stocks in action, visit the 5 Buy-Rated Banks With Increased Upside portfolio on Stockpickr.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

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.

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