BMO analyst Lana Chan on Friday upgraded TCF Financial to 'Outperform,' saying the bank was close to completing its transition away from heavy reliance on transaction fee income to high-margin specialty lending.
The company's net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and wholesale borrowings -- expanded to a very strong 4.86%, from 4.14% the previous quarter, and 4.02% a year earlier, reflecting the reduced interest expense and more profitable loan mix. Cooper said in July that "with rates low and even lower, we'll probably see some reduction in that very high net interest margin... somewhere around 4.6%, 4.65%," which Chan said would be "still well above the small-cap bank group average of 3.80%." TCF's shares closed at $10.44 Thursday, trading for 1.3 times tangible book value, according to Thomson Reuters Bank Insight, and for 10 times the consensus 2013 earnings estimate of $1.03, among analysts polled by Thomson Reuters. The consensus 2012 estimate is for a net loss of $1.19 a share. Chan called TCF's valuation "attractive," as the shares have "lagged peers YTD, up only 1% vs. a 21% gain for the BIX (S&P Bank Index)," and have lagged over the past three years, because of "outsized exposure to the downturn in the housing market (with 58% of its loans in home equity at its peak in 1Q08)," the regulatory hits to fee income, and the restructuring. As part of its transition, TCF is focusing on equipment leasing, inventory finance and auto lending, which together made up 32% of the company's total loans and leases as of June 30, increasing from 27% a year earlier. TCF grew these loans and leases 23% year over year, to $4.9 billion. Chan said that the company's new lending focus was in "typically higher-yielding businesses, which could help mitigate margin pressure in a period of extended low interest rates." Despite having a national lending platform, "TCB is still only a very small player in these large market segments," the analyst said, as "auto lending is over a $600 billion market and both Wells Fargo ( WFC) and JPMorgan Chase ( JPM) originated $6 billion in auto loans last quarter vs. TCB's $500 million of originations YTD." BMO believes that "TCB can manage the growth of these national businesses while maintaining strong credit oversight," and that "growth in the specialty finance businesses will help offset downsizing in its consumer portfolio and rebuild fee income." Interested in more on TCF Financial? See TheStreet Ratings' report card for this stock.