Bank Stocks: Jobs Report Winners

NEW YORK ( TheStreet) -- Fifth Third Bancorp ( FITB) was the winner among the largest U.S. banking names on Friday, with shares rising over 2.12% to close out the week at $13.76.

The U.S. Labor Department reported that the U.S. economy added 227,000 nonfarm jobs during February, declining from an upwardly revised increase of 284,000 in January, while the unemployment rate remained at 8.3%. This was the first time since early last year that payrolls have grown more than 200,000 three months in a row. In its daily economic commentary Deutsche Bank pointed out that the payroll numbers "have been revised higher in 19 of the past 20 months, which is consistent with what has transpired in the early stages of most economic cycles."

The The KBW Bank Index ( I:BKX) pulled back from earlier gains and was up 1% to close at 45.72, with all 24 index components rising for the day, except for Bank of America ( BAC), which was down a penny, to close at $8.05.

The Wall Street Journal on Friday reported that Bank of America was negotiating with regulators to avoid $850 million in penalties -- part of the $25 billion mortgage foreclosure settlement between federal regulators, states' attorneys general, and the largest loan servicers, announced on Feb. 9 -- by offering loan modifications, including principal reductions, to 200,000 borrowers.

A Bank of America spokesman told the Journal that the average balance reduction would be more than $100,000. While the full details of the plan have not been released, it's quite possible that investors holding mortgage paper backed by the mortgages Bank of America wishes to modify, may have other ideas.

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Bank of America's shares have returned 45% year-to-date, following last year's 58% plunge. The shares trade for 0.7 times tangible book value, according to Highline Financial, and 11 times the consensus 2012 earnings estimate of 71 cents a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $1.19.

Are bank stocks too hot?

The KBW Bank Index has now risen 16% year-to-date, following last year's 25% decline.

Sterne Agee analyst Todd Hagerman on Friday expressed caution over the sector's strong year-to-date performance, heading into next week, when the Federal Reserve will publicly announce the results of its annual stress tests on the largest U.S. bank holding companies, saying that "while bank stocks have regained their footing with an improved investor outlook and the recent steady flow of positive economic data," the likelihood for more subdued GDP forecasts relative to 2H11 are each likely to weigh on valuations and further potential upside in the shares."

Hagerman also said that the release of the stress test results 'will likely bring relatively weak underlying sector fundamentals back into focus," and that banks' plans to raise dividends and buy back shares "will generally fall well short of lofty investor expectations as the Federal Reserve is expected to be exceptionally more conservative this year relative to consensus/company expectations."

Fifth Third Bancorp

Fifth Third's shares have now returned 6% year-to-date, following an 11% decline during 2011.

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The Cincinnati lender's shares trade for 1.2 times tangible book value and for 10 times the consensus 2012 EPS estimate of $1.40. The consensus 2012 EPS estimate is $1.54.

Fifth-third is currently paying out eight cents a quarter, for a dividend yield of 2.33%.

Following the conclusion of the Federal Reserve's stress tests next week, investors expect Fifth Third to increase its quarterly dividend, with significant share buybacks also expected this year.

At the Citi Financial Services Conference on Wednesday, Fifth Third CFO Dan Poston threw red meat to investors, saying that "as a result of our strong position we incorporated into our Federal Reserve stress test submission our intention to continue the process of normalizing our dividend by moving it towards levels more consistent with the Fed's near-term payout ratio guidance of 30%."

Poston said that Fifth Third also "included common share repurchases in our submitted plan," and that the company's "capital levels already exceed fully phased-in Basel III standards."

Interested in more Fifth Third Bancorp? 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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