Big Banks Sink: Financial Losers (Update 1)

Updated with market close information, revised returns, and with a discussion on Citigroup.

NEW YORK ( TheStreet) -- Morgan Stanley ( MS) was the loser on Tuesday among the largest U.S. financial names, with shares sliding over 5% to close at $17.32.

The Down Jones Industrial Average declined over 200 points, after Chinese Premier Wen Jiabao on Monday lowered China's 2012 economic growth target to an eight-year low of 7.5%. Then on Tuesday, the European Union's statistics office confirmed that Europe's economy shrank in the fourth quarter, as exports and consumer spending declined. The EU said that the continent's gross domestic product contracted 0.3% from the third quarter, while exports declined by 0.4% after a 1.4% increase in the preceding quarter. European household spending fell 0.4%.

Meanwhile, the euro approached a three-week low on concerns that Greece wouldn't be able to complete its debt restructuring deal. The country's private creditors have until Thursday night to agree to a bond swap needed for Greece's to receive its second bailout package.

The The KBW Bank Index ( I:BKX) declined 3% to close at 43.81, with all 24 index components showing declines of over 1%.

Morgan Stanley's shares have now returned 15% year-to-date, following a 44% decline during 2011.

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Bank of America Merrill Lynch analyst Guy Moszkowski has a neutral rating on Morgan Stanley, with a $22 price objective, saying on Feb. 24 that the results of the Federal Reserve's stress tests -- which will be publicly announced next Friday -- "could indicate no capital return for MS in '12, which could disappoint some investors."

Despite what Moszkowski called "best in class" capital ratios, with a current Basell III Tier 1 common equity ratio of 8%, expected to increase to 10% at the end of 2012, the analyst said "near term EPS power appears constrained, which will likely prompt MS (and the Fed) to take a more conservative approach to capital return.

Mozskowski estimates that JPMorgan will earn $1.15 a share during 2012, followed by EPS of $2.14 in 2013.

Interested in more Morgan Stanley? See TheStreet Ratings' report card for this stock.

Shares of Bank of America ( BAC) declined over 3% to close at $7.71.

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The shares have now returned 39% year-to-date, following a 58% decline in 2011.

For Bank of America, the important thing about the stress tests is not any planned return of capital to investors, since the company "did not request approval of any return of capital strategies," according to RBC Capital Markets Gerard Cassidy," but the Fed's severe economic assumptions for the stress tests, together with BAC's lingering Countrywide mortgage mess, could make for some interesting stress test results.

Bank of America's shares were trading for 0.7 times tangible book value at Monday's close, according to HighlineFI, and for 11 times the consensus 2012 EPS estimate of 71 cents, among analysts polled by Thomson Reuters. The consensus 2013 estimate is $1.19.

Even after such a strong year-to-date run-up, there are 13 analysts rating Bank of America a buy, while 12 analysts are on the fence and three rate the shares "Underperform."

The mean price target for BAC is $9.58.

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

Shares of Citigroup ( C) declined 5% to close at $32.12.

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The shares have now returned 22% year-to-date, following last year's 44% plunge.

Citigroup currently pays a quarterly dividend of just a penny a share. CFO John Gerspach said during a presentation at the Credit Suisse Financial Services Forum on Feb. 8 that "only $11 billion of our $51 billion in deferred tax assets is currently included in Tier 1 common," and that "math would suggest that about $24 billion of our regulatory capital should be eventually released as Citi Holdings winds down."

Citi Holdings is the subsidiary holding noncore assets that Citigroup is winding down as part of CEO Vikram Pandit's "good bank/bad bank" strategy of righting the company's balance sheet.

Of course, a potential $64 billion in freed-up capital is a very significant figure. Bank of America Merrill Lynch analyst Guy Moszkowski followed up on Gerspach's presentation on Feb. 8, saying that the freeing up of the $64 billion in excess capital "will take years." Moszkowski rates Citigroup a "Buy" rating and $44 price objective.

Interested in more Citigroup? See TheStreet Ratings' report card for this stock.

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-- 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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