5 Bank Stock Winners for the First Quarter (Update 1)

Updated with comments from Credit Suisse, estimating that Bank of America won't achieve full compliance with Basel III capital requirements until late in 2014.

NEW YORK ( TheStreet) -- The first quarter was a remarkable ride for the stock market and for banks in particular. But the big question is whether the banking sector can keep up the torrid pace.

The S&P 500 Index ( SPX.X) rose 12% during the first quarter, while the Nasdaq Composite fared even better, rising 19%. The KBW Bank Index ( I:BKX) blew past both, with a whopping 26% year-to-date return, through Friday's close at 49.74. Then again, while both of the broad indexes had good returns for the 52-week period ended Friday, the KBW Bank Index was down 4% for the period.

The rally reflected a lousy performance during 2011 when investors -- and some of the banks -- couldn't get a handle on just how much losses the banks would take from mortgage putback demands and the long-negotiated mortgage foreclosure settlement.

Investors also worried about various threats to banks' revenue, with the Durbin Amendment's caps on interchanges fees charges to merchants to process debit card transactions being implemented by the Federal Reserve on October 1.

The Federal Reserve then saw its actions acting as a major catalyst for bank stocks, when the regulator announced the results of its 2012 bank holding company stress tests on March 13. JPMorgan Chase ( JPM) forced the Fed to move its announcement up by two days, when the company announced before the market closed on March 13 that the Fed hadn't objected to the company's plan to raise its dividend and authorize a major share repurchase plan.

The 19 holding companies subject to the Fed's Comprehensive Capital Analysis and Review (CCAR) for 2012 were stress-tested under a severe economic scenario In order to pass the stress tests, the results had to show that the group of 19's estimated Tier 1 common equity ratios would remain over 5% under the adverse economic scenario.

To have their capital plans approved, the companies' estimated Tier 1 capital ratios at the end of 2013 would have to be above 5%, "with all proposed capital actions through Q4 2013."

While some of the holding companies -- including Citigroup ( C), MetLife ( MET), SunTrust ( STI) and Fifth Third Bancorp ( FITB) -- had some or part of their plans to return capital to investors rejected by the Fed., most of the group of 19 announced dividend increases and share buybacks.

Bank of America ( BAC) was also a big winner from the stress tests, which included an analysis of mortgage putback risk under the adverse economic scenario. While the company didn't submit any plans to the Federal Reserve for dividend increases or share buybacks, the test results served to soothe investor fears that the Bank of America might need to further dilute its common shares through a major public offering.

Several of the best-performing large-bank stocks during the first quarter were trading significantly below tangible book value at the end of last year, underlining recovery bargains for investors. KBW analyst Fred Cannon said on March 25 that the banks' value rally might be sustainable if it were "taken over by firms with positive earnings estimate revisions."

Looking ahead, investors may need to look beyond book value and take a longer-term approach, focusing on banks trading at low multiples to consensus earnings estimates.

FIG Partners analyst John Rodis said on March 20 that investors should look at price multiples to 2013 earnings estimates, "because things are certainly better this year, and by 2013 you're going to have a good read on things."

Rodis added that "the group has momentum, but on a valuation basis, for the better quality names, it is hard to justify much higher levels," adding that "it also seems that there's new money coming into the group, from institutions that were sitting on the sidelines," so that "prices tend to overshoot," both on the downside, and now on the upside.

Among the largest U.S. bank holding companies, here are the five bring home the strongest returns for investors during the fourth quarter, along with forward P/E multiples and first-quarter earnings previews:

5. SunTrust
Shares of SunTrust of Atlanta closed at $24.17 Friday, returning 37% year-to-date, following a 40% decline during 2011.

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The shares trade just above tangible book value, according to HighlineFI, and for nine times the consensus 2013 earnings estimate of $2.69 a share, among analysts polled by Thomson Reuters.

After the Federal Reserve rejected the company's capital plan, SunTrust said in a statement on March 13 that it would "not be increasing its return of capital to shareholders at this time," and that it would maintain its current quarterly dividend of five cents a share, and "redeem certain trust preferred securities at such time as their governing documents permit, including when these securities are no longer expected to qualify as Tier 1 capital."

The company is scheduled to announce its first-quarter results on April 23. The consensus first-quarter EPS estimate is 31 cents, following earnings of 28 cents a share the previous quarter and eight cents a share during the first quarter of 2011, when the company repaid bailout funds owed to the government for assistance received through the Troubled Assets Relief Program, or TARP. Operating earnings during the first quarter of 2011 were 22 cents a share.

During the fourth quarter, SunTrust saw a 30% sequential decline in noninterest income to $723 million, with mortgage production related losses of $62 million, compared to mortgage production income of $41 million in the third quarter. Mortgage servicing income also declined, to $22 million in the fourth quarter, from $68 million the previous quarter. These items reflected an increased "mortgage repurchase provision, as well as a mortgage servicing rights valuation adjustment arising from anticipated refinance activity from the HARP 2.0 program."

The company's fourth-quarter earnings to common shareholders of $152 million reflected a $143 million reserve release.

Deutsche Bank analyst Matt O'Connor has a "Hold" rating on SunTrust, with a price target of $23.00. The analyst expects the company to report first-quarter EPS of 32 cents, saying on Friday that "Upside is likely coming from better than expected mortgage revenues (strong originations and lower putback costs) as well as lower credit related costs (which are included in expenses and have been very high the past two quarters)."

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

4. Citigroup
Shares of Citigroup closed at $36.55 Friday, returning 39% year-to-date, following last year-s 44% decline.

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The shares trade for 0.7 times tangible book value, and for eight times the consensus 2013 EPS estimate of $4.78.

After its 2012 capital plan -- which included a dividend increase and share buybacks -- was rejected by the Fed, Citigroup on March 13 said that "in light of the Federal Reserve's actions, Citi will submit a revised Capital Plan to the Federal Reserve later this year, as required by the applicable regulations."

Citigroup will report its first-quarter results on April 16, with the consensus among analysts being a 99-cent profit. Deutsche Bank analyst Matt O'Connor is far ahead of the consensus with a first-quarter EPS estimate of $1.19, because of the "rebound in capital markets," especially in trading revenue.

Analysts can expect a messy first quarter for Citigroup, which, according to O'Connor, will "include the impacts from a number of previously-disclosed sales of equity stakes, including: a $1.1b pre-tax gain from the sale of HDFC ($722m after-tax), a $349m after-tax gain from the sale of Shanghai Pudong Development Bank, and a $1.1b pre-tax impairment charge ($700m after-tax) from C's plans to reduce its Akbank stake by 50%."

O'Connor rates Citigroup a "Buy," and on Friday raised his price target for the shares to $40 from $36.

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

3. JPMorgan Chase
Shares of JPMorgan Chase closed at $45.98 Friday, returning 39% year-to-date, following a 20% decline during 2011.

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The shares trade for 1.5 times tangible book value, and for eight times the consensus 2013 EPS estimate of $5.52.

The company on March 13 announced an increase of its quarterly dividend to 30 cents from 25 cents, and the authorization of $15 billion in share buybacks, including $12 billion this year, and another $3 billion authorized for the first quarter of 2013.

JPMorgan Chase will report its first-quarter results on April 13, and the analyst consensus is for the company to post EPS of $1.13.

Deutsche Bank analyst Matt O'Connor rates JPMorgan a "Buy," and on Friday raised his price target for the shares by $5 to $50, and estimated the company would report first-quarter earnings of $1.19 a share.

Following the company's Investor Day presentations late last month, O'Connor said that JPMorgan Chase "should do well in good times" with annual earnings approaching $6.50 a share, after moving beyond 'mortgage-related hits."

For the first quarter, O'Connor expects "a solid rebound in overall revenue excluding credit and debit valuation adjustments, driven by a meaningful pick up in capital market revenues (particularly within FICC trading), as well as higher mortgage and asset management revenues."

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

2. Regions Financial
Shares of Regions Financial ( RF) of Birmingham, Ala., closed at $6.59 Friday, returning 54% year-to-date, after a 38% decline last year.

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The shares trade for nine times the consensus 2013 EPS estimate of 75 cents.

The company owes $3.5 billion in TARP money, which it expects to repay in April.

Regions on March 19 commenced a $900 million common stock offering, and said that including the offering's net proceeds of $875 million, the money from its pending sale of Morgan Keegan to Raymond James Financial ( RJF) sale and a full redemption of TARP preferred shares held by the U.S Treasury, that its Tier 1 common equity ratio its Tier 1 common equity ratio, based on fourth-quarter numbers, would be a strong 9.51%.

The company will report its first-quarter results on April 24, with a consensus EPS estimate of seven cents.

Deutsche Bank analyst Matt O'Connor rates Regions a "Buy," and on Friday raised his price target for shares by a dollar, to $7.50.

O'Connor's first-quarter outlook for Regions "reflects lower net interest income given lower earning assets (continued run-off of RF's investor real estate and home equity portfolios) and higher mortgage prepayments in the securities book. However, offsets to these net interest margin headwinds are opportunities lower funding costs, reduce excess cash levels and continued pricing discipline on loans."

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

5. Bank of America
Shares of Bank of America closed at $9.57 Friday, returning 72% year-to-date, following a 58% plunge during 2011.

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The shares trade for 0.8 times tangible book value, and for eight times the consensus 2013 EPS estimate of $1.20.

Bank of America will report its first-quarter results on April 19, and the consensus among analysts is for the company to show a profit of 13 cents a share.

Deutsche Bank analyst Matt O'Connor has a "Hold" rating on the shares, but on Friday raised his price target to $9.00 from $7.50.

O'Connor estimates BAC will post first-quarter earnings of 20 cents a share, exclusive of credit and debit valuation adjustments, "although most of the $3.3b of CVA/DVA hit we've assumed won't impact regulatory capital."

The analyst said on Friday that trading revenue "should rebound meaningfully vs. a very weak 4Q given seasonally stronger activity and spread improvement."

While Bank of America passed the Fed's stress tests with flying colors, O'Connor still sees a common equity raise being possible, "to repay the $5b of preferreds from Buffett (which won't count towards Tier 1 capital starting in 2013)."

Warren Buffett's Berkshire Hathaway ( BRK.B) purchased $5 billion in Bank of America preferred shares in August, with a lovely 6% coupon, with the shares being redeemable by BAC "at any time at a 5 percent premium." Buffet's deal included warrants to purchase 700 million Bank of America common shares "at an exercise price of $7.142857 per share," putting Berkshire in the money by a cool $1.7 billion at Friday's close.

Bank of America's shareholders may also be facing an extended wait for a dividend increase, since Credit Suisse analyst Moshe Orenbach doesn't think the company will achieve full compliance with the Basel III capital requirements until late 2014.

The analyst on Monday estimated that Bank of America's Basel III Tier 1 common equity ratio would be 7.1% at the end of 2012, rising to 8.4% at the end of 2013.

Including a 7.00% Tier 1 common equity ratio requirement, plus an estimated 2.00% extra, as a "systemically important financial institution," Orenbuch said Bank of America will need a Tier 1 ratio of 9.00% to achieve full compliance, as the company "continues to optimize the balance sheet, which has included sales of financial stakes, as well as sales of mortgage servicing rights and risk-weighted assets mitigation."

Interested in more on Bank of America? 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.

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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