3 'Quite Attractive' Regional Bank Value Plays from UBS

NEW YORK ( TheStreet) -- UBS analyst Stephen Scinicariello recommends three regional banks for investors seeking to limit exposure to events in Europe while minimizing regulatory worries at home.

UBS said on Tuesday that "mid-cap regional bank stocks are down 6% on average over the past quarter due to a return of concerns pertaining to global macroeconomic events," but because of "their lack of direct exposure to these risks and favorable relative positioning in the new regulatory paradigm, we continue to see several attractive opportunities."

Heading into second-quarter earnings season, Scinicariello projects for the 12 midcap banks covered by his firm sequential loan growth of roughly 2%, with "modest" pressure on net interest margins, continued improvement in credit quality and "solid expense management, "which should translate into higher pretax pre-provision run rates (+4%)."

The "provision" refers to banks' quarterly provisions for loan losses, which have a direct effect on quarterly earnings.

Scinicariello said that "regional bank valuations are attractive," at less than 1.5 times tangible book value and 12 times "forward earnings; especially considering the EPS growth we anticipate for 2013," and that "better-than-feared fundamentals should continue to lead to revaluation of the sector."

The analyst said that "the fundamental distinction across the banking sector is becoming increasingly apparent with the largest, more complex institutions on one end of the spectrum and the regional banks on the other." This is made quite apparent when comparing valuations for the largest three U.S. banks to those of the three regional names favored by UBS, which trade for at least 8.5 times consensus forward earnings estimate:
  • Shares of JPMorgan Chase (JPM) closed at $35.32 Monday, returning 8% year-to-date, following a 20% decline during 2011. The shares trade for 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for less than seven times the consensus 2013 EPS estimate of $5.32, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.35. Based on a 30-cent quarterly payout, JPMorgan's shares have a dividend yield of 3.40%.
  • Bank of America (BAC) closed at $7.60 Monday, returning 37% year-to-date, after dropping 58% during 2011. The shares trade for 0.6 times their reported March 31 tangible book value of $12.87, and for less than eight times the consensus 2013 EPS of a dollar. The consensus 2012 EPS estimate is 58 cents.
  • Shares of Citigroup (C) closed at $26.75 Monday, returning 2% year-to-date, following a 44% decline during 2011. The shares trade for just over half their reported March 31 tangible book value of $50.90, and less than six times the consensus 2013 EPS of $4.60. The consensus 2012 EPS estimate is $4.02.

Scinicariello said that his firm believes "that there has been a secular shift in the industry due to the new regulatory paradigm which favors regional banks," since the application of new regulatory capital rules announced on June 7 "would only cost capital ratios approximately 70 basis points on average," for the midcap banks covered by UBS. Therefore, "to the extent regional bank stocks continue to be characterized as being the undifferentiated from larger-cap institutions, we view this as an opportunity."

In the "slow growth" domestic economic environment, UBS continues "to expect regional banks to continue to take market share and continue to grow."

Here are the three buy-rated midcap bank names for which "relative value appears quite attractive," according to UBS:

KeyCorp
Shares of KeyCorp ( KEY) of Cleveland closed at $7.46 Monday, down 2% year-to-date, following a 12% decline during 2011.

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Based on a five-cent quarterly payout, the shares have a dividend yield of 2.68%.

The shares trade for 0.8 times their reported March 31 tangible book value of $9.28, and for nine times the consensus 2013 earnings estimate of 81 cents. The consensus 2012 EPS estimate is 77 cents.

UBS's price target for KeyCorp is $10, and the firm on Monday left unchanged its 2012 EPS estimate of 83 cents and its 2013 estimate of 95 cents.

In contrast to many regional banks facing declining net interest margins as short-term rates remain near zero and long-term rates for new loans and investment securities continue to decline, Scinicariello said that "KEY has opportunities to increase its NIM as higher costing CDs and liabilities are further reduced." For the second quarter, UBS "conservatively" projects "a flat NIM at 3.16% but forecasts a ramp to 3.23% by 4Q12." Expected redemptions of $700 million in trust preferred shares during the third quarter should "be 5% accretive on an annualized basis."

UBS projects roughly "4% growth for 2012 and outperformance in this area would be a significant positive, in our view."

KeyCorp's board of directors authorized a $344 million stock buyback plan in March, and Scinicariello expects "$127.5MM of buybacks this quarter."

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

Fifth Third Bancorp
Shares of Fifth Third Bancorp ( FITB) of Cincinnati closed at $12.72 Monday, returning 1% year-to-date, following an 11% decline last year.

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Based on a quarterly payout of eight cents, the shares have a dividend yield of 2.52%.

The shares trade for 1.1 times their reported March 31 tangible book value of $11.64, and for 8.5 times the consensus 2013 EPS estimate of $1.50. The consensus 2012 EPS estimate is $1.49.

UBS's price target for Fifth Third is $16. The firm on Tuesday raised its 2012 EPS estimate for Fifth Third by three cents to $1.51, "in order to account for continued strength in mortgage banking," while also raising its 2013 EPS estimate by three cents, to $1.63.

Scinicariello said that during the first quarter, Fifth Third's "run rates for fee income and expenses improved and it will be important for FITB to maintain these levels." Fifth Third's guidance calls for expenses to decline by $15 million during the second quarter from $973 million last quarter while UBS models "a $7MM reduction to $965.6MM."

The analyst expects Fifth Third's net interest margin to "decline by 8bps this quarter to 3.53% (slightly worse than the 5-6bps guided to) and would anticipate some improvement in forward guidance due to trust preferred redemptions (>$1.4B in 2012)."

Scinicariello also expects "loan growth (1.5% sequentially)" and said that "improved guidance on this front" from KeyCorp's management "could be a key driver."

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

Comerica
Shares of Comerica ( CMA) of Dallas closed at $29.19 Monday, returning 14% year-to-date, following a 38% decline during 2011.

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Based on a 15-cent quarterly payout, the shares have a dividend yield of 1.98%.

The shares trade for 0.9 times their reported March 31 tangible common equity per share of common stock of $32.06, and for 11 times the consensus 2013 earnings estimate of $2.71. The consensus 2012 EPS estimate is $2.06.

UBS's price target for Comerica is $37, and "in order to more fully account for the execution of CMA's approved capital plan" raised its 2012 EPS estimate for the bank to $2.50 from $2.42, and its 2013 estimate to $2.82 from $2.78.

Scinicariello said that "in order for CMA to sustain its relative outperformance among regional banks, positive trends from 1Q12 need to exhibit follow-through in the areas of loan growth, NIM, and expense management," and that UBS expects "consistency and do not anticipate any change to 2012 guidance."

Scinicariello also said that "CMA has more than delivered on its promise to aggressively manage its excess capital, increasing its dividend by 50% to a 25% of earnings payout level and authorizing the repurchase of $375MM of stock (we project ~$120MM in 2Q12)."

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

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

>Contact by Email.

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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