5 Bank Stock Earnings Bets From Morgan Stanley

NEW YORK ( TheStreet) -- With expectations of strong mortgage banking results, continued commercial loan growth and improvement in consumer credit, Morgan Stanley analyst Betsy Graseck on Monday listed five favored bank stocks.

Citing Federal Reserve data "which reflects C&I growing +12% y/y and +15% q/q in most recent week, along with other improved economic indicators, a domestic market share grab by U.S. banks from European banks pulling back, along with "excess capital and liquidity at select banks, and an increased willingness to lend," Graseck said that Morgan Stanley favored four super-regionals, heading into earnings season, including U.S. Bancorp ( USB), PNC Financial Services Group ( PNC), BB&T ( BBT) and Wells Fargo ( WFC)," and also listed Capital One ( COF) as favored, among credit card lenders.

Graseck also expects investment banking fees to rebound for the four "Money Center Banks" covered by Morgan Stanley, and estimates that total capital markets volume for the group will rise 14% during the first quarter from the fourth quarter, although the volume will still be down 9% year-over-year:
  • For Bank of America (BAC), Morgan Stanley expects investment banking advisory and underwriting fees to total $1.4 billion during the first quarter, increasing 33% from the fourth quarter, but declining 8% from the first quarter of 2011. Graseck raised here first-quarter earnings estimate for BAC to six cents a share, on lower expected mortgage putback costs. The analyst estimates the company will earn 55 cents a share this year, followed by EPS of 97 cents during 2013. Graseck rates the shares "Equal Weight," with a $9.00 price target.
  • Morgan Stanley estimates that Citigroup (C) will report first-quarter investment banking revenue of $1.0 billion, increasing 60% from the fourth quarter, and 20% year-over-year. On March 18, Graseck had raised her first-quarter EPS estimate for Citi to 88 cents from 66 cents, because of the improved capital markets volume, lower credit card loan losses, and "gains in special asset pool on credit spread tightening." The analyst noted that here estimate excluded "$700m of debit valuation adjustment losses (16c per share) and $1.1b gain on sale of its stake in the Indian lender Housing Development Finance Corp. (24c per share)." Graseck has a neutral rating on Citigroup, with a $42 price target, and estimates the company will earn $3.67 a share this year, followed by 2013 EPS of $4.40.
  • For JPMorgan Chase (JPM), Graseck estimates first-quarter investment banking revenue of $1.7 billion, increasing 49% from the fourth-quarter, but down 7% from a year earlier. Graseck has an "Overweight" rating on JPMorgan, with a $60 price target. The analyst on March 18 raised her first-quarter EPS estimate for JPM to $1.22 from $1.07, on the stronger expected investment banking volume, as well as "stronger mortgage banking origination results driven by higher gain on sale, greater market share given BAC's pull-back and higher estimated industry-wide origination volumes from refis," and lower credit card losses. Graseck estimates the company will earn $4.88 a share during 2012, followed by 2013 EPS of $5.63.
  • Morgan Stanley expects Goldman Sachs (GS) to post first-quarter investment banking revenue of $1.1 billion, increasing 26% from the previous quarter, but down 15% from a year earlier. Graseck on March 18 raised her first-quarter EPS estimate for Goldman to $3.25 from $2.16, on stronger underwriting and trading revenues, and "positive marks in the investing and lending segment given rising asset prices this quarter." Graseck has a neutral rating on the shares, and estimates Goldman will earn $11.10 a share this year, followed by 2013 EPS of $13.21.

Here's a quick look at the four super-regional banking names and one card lender favored by Graseck heading into first-quarter earnings season. All are rated "Overweight" by Morgan Stanley:


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U.S. Bancorp

Shares of U.S. Bancorp of Minneapolis closed at $31.70 Friday, returning 17% year-to-date, following a 2% return during 2011.

Following the completion of the Federal Reserve's 2012 stress tests, USB on March 14 announced that it would increase its quarterly dividend to 19.5 cents from 12.5 cents, and that its board of directors had authorized the repurchase of up to 100 million common shares. Based on the new dividend payout, the shares have a dividend yield of 2.46%.

Graseck on Sunday raised her price target for U.S. Bancorp is $34.00 from $32.00, while raising her first-quarter earnings estimate by three cents to 64 cents, "due to stronger mortgage banking revenue." The analyst estimates USB will earn $2.73 a share in 2012, followed by 2013 EPS of $2.87.

When discussing her outlook for the shares, Graseck said "risks include lower share repurchases, slower commercial and industrial, or C&I and residential lending growth, and higher drag from Durbin amendment than our current forecast.

On the positive side, the analyst said "increased buybacks, dividends, C+I loan growth, and residential mortgage growth than our current forecast, accretive acquisitions, and less drag from Durbin amendment."

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


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PNC Financial Services Group

Shares of PNC Financial Services Group of Pittsburgh closed at $63.36 Friday, returning 10.5% year-to-date, following a 3% pullback during 2011.

PNC on March 13 said that the Federal Reserve had "accepted its capital plan and did not object to the capital actions, which included recommendations to increase the quarterly common stock dividend in the second quarter of 2012 and a modest share repurchase program under PNC's existing common stock repurchase authorization."

PNC is currently paying a quarterly dividend of 35 cents a share, for a dividend yield of 2.21%.

Graseck on Sunday raised her price target for PNC by two dollars to $65, although she left her first-quarter EPS estimate unchanged at $1.45. The analyst raised her full year EPS estimate for 2012 by a dime to $6.47, "due to higher mortgage banking fees." Morgan Stanley's 2013 EPS estimate is $6.57.

According to Graseck, downside risks for PNC include "slower than expected economic growth, with consequent softer commercial credit expansion, higher loan and commercial MBS losses than forecast, and lower equity markets that could drive down" the value of the company's investment in BlackRock ( BLK).

Upside factors "include incremental expense control, faster credit improvement, more cross-sell, higher Blackrock related fee income revenue than we are anticipating, more capital management and faster than expected loan growth," according to Graseck.

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


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BB&T

Shares of BB&T of Winston-Salem, N.C., closed at $30.99 Friday, returning 26% year-to-date, following a 2% decline last year.

BB&T on March 13 increased its quarterly dividend by four cents to 20 cents, and also said the Federal Reserve didn't object to the company's "plans to redeem $3.2 billion of trust preferred securities beginning in 2012 without issuing any replacement capital." The shares now have a dividend yield of 2.58%.

Also on March 13, BB&T modified its deal to acquire BankAtlantic Bancorp's ( BBX) thrift subsidiary, agreeing to pay a premium of up to $316 million to acquire 78 South Florida branches, and $3.3 billion in deposits, while also agreeing to "assume BankAtlantic Bancorp's obligations with respect to its outstanding trust preferred securities, with an aggregate principal balance of approximately $285 million."

Graseck left her price target for BB&T unchanged at $33, but raised her first-quarter EPS estimate by a penny to 60 cents, "on higher mortgage banking income."

Morgan Stanley estimates that BB&T will earn $2.70 a share for all of 2012, followed by 2013 EPS of $3.08.

According to Graseck, downside risk for BB&T includes "increased competition slowing loan growth, shrinking loan spreads, flat losses, and slower than expected expense reductions," while upside factors "include faster deposit and loan growth, faster efficiency improvements, well-priced M&A, and net interest margin expansion."

Interested in more on BB&T? See TheStreet Ratings' report card for this stock.


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Wells Fargo

Shares of Wells Fargo closed at $33.53 Friday, returning 23% year-to-date, following a 10% decline during 2011.

The company on March 14 raised its quarterly dividend to 22 cents from 12 cents, and announced that the regulator hadn't objected to a plan to increase its share buybacks from last year.

During 2011, Wells Fargo bought back 26.6 million shares, and under its buyback program was authorized to repurchase another 117.3 million shares, as of Dec. 30.

Based on the increased quarterly payout, the shares have a dividend yield of 2.62%.

Graseck on Sunday raised her price target for Wells Fargo to $46 from $34, while increasing her first-quarter EPS estimate to 78 cents from 72 cents, "due to stronger mortgage banking."

The analyst estimates that Wells Fargo will earn $3.38 a share for all of 2012, followed by 2013 EPS of $3.31.

For Graseck the downside risks to her price target for Wells Fargo include "fewer share repurchases, inability to meet Compass cost savings targets, sharp decline in accretable yield, higher reserve requirements, sharply declining home prices, and higher credit losses given WFC's sizable consumer real estate lending portfolio."

Upside factors include winder net interest margins and "lower expense ratio driven by prior balance sheet and expense restructuring, and higher accretion than expected from the Wachovia acquisition." Wells Fargo more than doubled in size when it acquired Wachovia at the end of 2008.

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


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Capital One Financial

Shares of Capital One Financial of McLean, Va., closed at 55.74 Friday, returning 32$ year-to-date, following a flat return during 2011.

The company recently completed its long-delayed acquisition of ING Direct, and expects soon to complete its purchase of HSBC's ( HBC) $30 billion U.S. card portfolio for a $2.6 billion premium having been received. The company last Wednesday priced a $1.25 billion common equity offering.

Graseck's $67 price target for Capital One was unchanged, as were her earnings estimates of $1.38 a share for the first quarter, with full-year 2012 EPS of $6.87, followed by 2013 EPS of $6.96.

Graseck expects "some noise this quarter as COF closed the ING acquisition Feb 17," and added that "COF will also provide final accounting adjustments related to the ING Direct acquisition (either on earnings day or with 1Q12 10Q filing)."

The analyst said that risks to her price target for Capital One include "higher than expected rise in credit costs, high attrition on acquired ING Direct deposits and HSBC Card loans, higher than expected integration costs, and lower than expected synergies from acquisitions.

Upside factors include "faster loan growth, and higher expense synergies," according to Graseck.

Interested in more on Capital One? See TheStreet Ratings' report card for this stock.

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

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

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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.