Commerce Bancshares: Financial Winner

NEW YORK ( TheStreet) -- Commerce Bancshares ( CBSH) was the winner among the largest U.S. financial names on Thursday, with shares rising 2% to close at $39.28.

The broad indexes all declined, despite a U.S. Labor Department report that initial jobless claims for the week ended July 7 declined to 350,000 from an upwardly revised 376,000 the previous week. Unemployment claims for the week ended July 7 were at their lowest level since March 2008, but some economists were skeptical that the numbers showed real economic improvement, because of seasonal factors.

The KBW Bank Index ( I:BKX) declined over 1% to close at 44.46, with all 24 index components showing declines for the session, except for Commerce Bancshares.

Investors' eyes early on Friday will turn to JPMorgan Chase ( JPM), which will report its second-quarter results at 7AM, with analysts polled by Thomson Reuters estimating a profit of 72 cents a share, declining from $1.31 during the first quarter, and $1.27 during the second quarter of 2011.

JPMorgan's shares declined 2% to close at $34.04. The shares are now down 16% since closing at $40.74 on May 10, right before CEO James Dimon disclosed a hedge trading loss by its Chief investment Office (CIO) estimated at "slightly more than $2 billion." Dimon said that as the company wound down the hedge trading positions, the losses might climb higher, and the New York Times reported on June 28 that cumulative losses from the trades could eventually total as much as $9 billion, while the Wall Street Journal reported on Wednesday that the trading losses could total $5 billion.

JPM Chart JPM data by YCharts

JPMorgan's shares are cheaply priced, trading just below their reported March 31 tangible book value of $34.91, and for six times the consensus 2013 earnings estimate of $5.29 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.21.

Based on a 30-cent quarterly payout, the shares have a dividend yield of 3.53%.

RBC Capital Markets analyst Gerard Cassidy rates JPMorgan Chase "Outperform," with a $50 price target, saying on Thursday that "if the gross trading losses are $5 billion or less and the company can prove it has "ring fenced" the problem, the stock will rally (assuming its core businesses report solid-to-good results)." On the other hand, the analyst said that "trading losses above $5 billion and a discovery that the CIO contributed a high percentage to historical earnings would likely lead to the stock 'selling-off', in our opinion."

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

Following JPMorgan's earnings report at 7AM, Wells Fargo ( WFC) will report its second-quarter results at 8AM EST, with analysts expecting a second-quarter profit of 81 cents a share, increasing from 75 cents the previous quarter and 70 cents a year earlier.

Wells Fargo has been one of the strongest and most consistent earners among the largest U.S. banks, with operating returns on average assets ranging between 1.21% and 1.30% over the past five quarters, according to Thomson Reuters Bank Insight.

Guggenheim Securities analyst Marty Mosby rates Wells Fargo a "Buy," with a $40 price target, and estimates the company will post second-quarter EPS of 82 cents. The analyst said on Wednesday that "strong mortgage banking fee income and balance sheet growth is expected to overcome 5 basis points of net interest margin compression."

Mosby also said that "the critical development this quarter is the expected decline in expenses" which he expects "to fall over $150 million this quarter, even though revenues are expected to increase $400 million." The combination of increasing revenue and declining expenses "should push WFC's efficiency ratio down almost 2 percentage points sequentially in 2Q12E to 57.7%."

A bank's efficiency ratio is, essentially, the number of pennies of expenses it incurs for each dollar of revenue generated.

Wells Fargo's shares declined over 1% on Thursday, to close at $32.85. The shares have now returned 20% year-to-date, following a 10% decline during 2011.

WFC Chart WFC data by YCharts

The shares trade for twice their tangible book value, according to Thomson Reuters Bank Insight, and for nine times the consensus 2013 EPS estimate of $3.65. The consensus 2012 EPS estimate is $3.28.

Based on a quarterly dividend of 22 cents, Wells Fargo's shares have a dividend yield of 2.68%.

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

Commerce Bancshares surprised investors and analysts by reporting a second-quarter profit of $74.3 million, or 84 cents share, beating by a wide margin the consensus estimate of a 72-cent profit.

The strong results reflected a widening net interest margin, reflecting strong loan growth late in the quarter, revenue from investments in inflation protected securities (TIPS), and interest income from nonperforming loans.

Commerce also saw increases in fee revenue that nearly offset a significant decline in debit card interchange fees, brought about by the Durbin Amendment to the Dodd-Frank bank reform legislation, which capped the fees beginning in the fourth quarter of last year.

Please see TheStreet's earnings coverage for much more detail on Commerce's second-quarter results.

Commerce's shares have now returned 4% year-to-date, following a 2% decline during 2011.

CBSH Chart CBSH data by YCharts

The shares trade for 13 times the consensus 2013 earnings estimate of $2.99 a share. The consensus 2012 EPS estimate is $2.95.

Based on a quarterly payout of 23 cents the shares have a dividend yield of 2.34%.

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

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

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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.