5 Bank Stocks Bernanke Can't Hurt Anymore

NEW YORK ( TheStreet) -- The Federal Reserve's latest move to push long-term rates lower will add fuel to the fire for some banks with assets repricing faster than liabilities, but there are other banks that have already felt the worst effects of margin compression, and Ben Bernanke's latest move also contains a silver lining for the industry.

The Federal Reserve Open Market Committee on Thursday announced that the central bank would purchase "additional agency mortgage-backed securities at a pace of $40 billion per month," bringing its total mortgage-backed securities purchases to a pace of roughly $85 billion per month. The Fed also said that "exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015." The target federal funds rate is currently at a range 0 to 0.25%.

Since the Fed's target federal funds rate has been in a range of between 0% and 0.25% since December 2008, most banks have already enjoyed most of the benefit of a decline in their funding cost, and since long-term rates have continued to decline, the industry is seeing its rate spreads continue to narrow.

The Federal Deposit Insurance Corp. reported that during the second quarter, the aggregate net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- for the nation's banks and savings and loan associations narrowed to 3.46% during the second quarter, from 3.52% the previous quarter, and 3.61% a year earlier.

According to Guggenheim Securities analyst Marty Mosby, among the largest U.S. bank holding companies, " Wells Fargo ( WFC) has the most margin compression today expected over the next year," as the company has a large percentage of assets with original maturities of greater than three years, that are "repricing down now, lower than they were three years ago."

Speaking at the Barclays Capital Global Financial Services Conference last Tuesday, Wells Fargo CFO Tim Sloan said that although the company achieved a "stable" net interest margin during the second quarter, in part because of "a 7 basis point linked quarter benefit from higher variable items," the margin for the third quarter "could be similar to what we experienced in the third quarter of last year when our net interest margin was down 17 basis points."

During the second quarter, Wells Fargo's net interest margin, or NIM, was a relatively high 3.91%, unchanged from the first quarter, but declining from 4.01% in the second quarter of 2011. Mosby expects the company's margin to contract by a further 21 basis points from the second quarter, through the fourth quarter of 2013.

Wells Fargo posted good second-quarter results, as strong mortgage loan demand fed earnings applicable to common stock of $4.4 billion, or 82 cents a share, increasing from $4.0 billion, or 75 cents a share, the previous quarter, and $3.7 billion, or 70 cents a share, a year earlier.

Wells Fargo trades at a premium to the remaining three members of the "big four" banking club, reflecting a steadier and stronger earnings track record over the past few years, as well as the company' strong mortgage lending position. The company's operating returns on average assets (ROA) have ranged between 1.26% and 1.40% over the past five quarters, according to Thomson Reuters Bank Insight, while its operating returns on equity (ROE) have ranged between 11.51% and 12.37%. The shares closed at $35.33 Monday, trading for 2.1 times tangible book value, according to Thomson Reuters Bank Insight, and for 10 times the consensus 2013 earnings estimate of $3.66 a share, among analysts polled by Thomson Reuters.

Mosby rates Wells Fargo a "Buy," and on Monday raised his price target for the shares by two dollars, to $43, "due to our continued expectation that WFC can produce consistent double-digit earnings per share growth."

Here's a quick look at price multiples and margin developments for the remaining three of the "big four" club:
  • Shares of JPMorgan Chase (JPM) closed at closed at $41.19 Monday, trading for 1.3 times tangible book value, and for seven times the consensus 2013 EPS estimate of $5.20. Over the past five quarters, the company's ROA has ranged from 0.68% to 0.99%, while its ROE has ranged from 8.25% to 11.94%. JPMorgan reported a second-quarter deposit margin of 2.62%, narrowing from 2.68% the previous quarter, and 2.83% a year earlier. Mosby in August included JPMorgan among a list of banks "most exposed to continuing continued NIM pressure," including Wells Fargo, M&T Bank (MTB) and Zions Bancorporation (ZION), but also said that "we expect all four to grow earning assets fast enough to produce positive net interest income growth." The analyst estimates that JPMorgan's net interest margin will compress by 17 more basis points, from the second quarter of 2012 through the fourth quarter of 2013.
  • Shares of Citigroup (C) closed at $34.06 Monday, trading for 0.7 times tangible book value, and for 7.5 times the consensus 2013 EPS estimate of $4.53. Citigroup's ROA has ranged from 0.20% to 0.77% over the past five quarters, while the company's ROE has ranged from 2.18% to 8.41%. The company's second-quarter net interest margin was 2.81%, narrowing from 2.90% the previous quarter, and 2.82% a year earlier. CEO Vikram Pandit said during Citi's second-quarter earnings call that "despite the persistent low-rate environment, we've been able to offset spread compression with new client mandates and higher transactions volumes which have enabled us to grow earnings." Citi's net interest revenue declined to $11.6 billion during the second quarter, from $11.9 billion in the second quarter, and $12.1 billion during the second quarter of 2011, "largely due to continued declining loan balances in Local Consumer Lending" within the Citi Holdings run-off subsidiary, according to the company.
  • Shares of Bank of America (BAC) closed at $9.30 Monday, trading for 0.7 times tangible book, and for 10 times the consensus 2013 EPS estimate of 91 cents. Over the past five quarters, Bank of America's ROA has ranged from a negative 1.51% - during the second quarter of 2011, when the company lost $8.8 billion, or 90 cents a share, mainly from a mortgage putback settlement with private investors -- to 1.08%. The company's ROE has ranged from a negative 15.02% to 11.21%, over the same period. Bank of America reported a second-quarter net interest yield of 2.21%, narrowing from 2.51% in the first quarter, and 2.50% in the second quarter of 2011. During the company's earnings conference call in July, CFO Bruce Thompson said "we clearly would not expect to see the decline in interest rates that we saw from the end of the first quarter to the end of the second quarter going forward." Mosby estimates that Bank of America's net interest margin will only contract by a further six basis points, through the end of 2013.

Indeed, Mosby sees a potential silver lining in the Federal Reserve's latest easing. "The interesting thing is that the yield curve steepens as you continue this process" of pushing down long-term rates. "Monetary actions when rates are this low, defend the economy, which mentally moves the investors to worrying about the monetary easing," with inflation becoming a concern, as the fear of a recession subsides.

The banks that have maintained the highest net interest margins so far during this period of historically low rates are going to see increasing pressure to their net interest margins over the next year, while the ones with lower margins that have already felt the margin pain are not likely to see much further narrowing of spreads, and may even see improving margins.

Here are the five large U.S. banks that Mosby estimates will face the least net interest margin compression through the end of 2013, counting down to the one name expected to show an improved margin:

5. BB&T
Shares of BB&T Corp. ( BBT) of Winston-Salem, N.C., closed at $33.57 Monday, returning 36% year-to-date, following a 2% decline during 2011.

The shares trade for 2.2 times tangible book value, according to Thomson Reuters Bank Insight, and for 11 times the consensus 2013 earnings estimate of $3.04 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $2.76.

Based on a quarterly payout of 20 cents, the shares have a dividend yield of 2.38%.

BB&T reported second-quarter net income available to common shareholders of $510 million, or 72 cents a share, improving from $431 million, or 61 cents a share, in the first quarter, and $307 million, or 44 cents a share, during the second quarter of 2011.

The company's second-quarter ROA was 1.22%, improving from 1.03% the previous quarter, and 0.83% a year earlier. The second-quarter return on average common equity was 11.21%, increasing from 9.75% in the first quarter, and 7.25% in the second quarter of 2011.

BB&T's net interest margin was 3.95 during the second quarter, increasing from 3.93% the previous quarter, and 4.15% a year earlier.

During the third quarter, BB&T took some obvious steps in light of regulatory changes, that will help defend the net interest margin. The company on July 18 redeemed $2.475 billion in trust preferred and other capital securities, of which $1.525 billion had fixed coupons of 6.75% or higher. $350 million in enhanced trust securities had a coupon of 8.10% and $575 million paid 9.60%. The company then on July 25 issued $1 billion in noncumulative preferred shares, with a coupon of 5.625%. The move was done in part because under the Federal Reserve's rules proposed in June to implement the Basel III capital requirements, most trust preferred equity will be excluded from regulatory Tier 1 capital.

Mosby estimates that BB&T's net interest margin will contract by another 10 basis points from the second quarter of 2012 through the end of 2013.

The analyst has a neutral rating on BB&T, and on Monday raised his price target for the shares to $35 from $32, saying he expected the company "to earn around 17% on tangible common equity in 2013 with a cost of equity around 11%," and that "BBT's strong capital position and management approach should allow the bank to increase dividends, capture market share, and take advantage of opportunistic acquisitions."

"As a result of continued growth in earnings and dividends, we think BBT represents a good long-term investment that is currently fairly priced," he said.

BBT Chart BBT data by YCharts

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

4. State Street
Shares of State Street ( STT) of Boston closed Monday at $43.91, returning 10% year-to-date, following an 11% decline last year.

The shares trade for 1.8 times tangible book value, and for 10 times the consensus 2013 EPS estimate of $4.31. The consensus 2012 EPS estimate is $3.85.

Based on a quarterly payout of 24 cents, the shares have a dividend yield of 2.19%.

State Street reported second-quarter net income available to common shareholders of $480 million, or 98 cents a share, compared to $417, or 85 cents a share, in the first quarter, and $502 million, or a dollar a share, in the second quarter of 2011. The company's second-quarter return on average common equity was 10.3%, increasing from 8.6% the previous quarter, but and 10.2% a year earlier.

State Street's second-quarter net interest margin was 1.72%, increasing from 1.64% in the first quarter, but declining from 1.76% during the second quarter of 2011. While the company's net interest margin is narrow, fee revenue from the company's core from trust, custody and asset management business made up 73% of total second-quarter revenue, while net interest revenue was only 28% of total revenue.

Mosby estimates that State Street's net interest margin will contract by another nine basis points through the end of 2013.

The analyst rates State Street a "Buy," and on Monday raised his price target for the shares by $55 from $49, "based on our detailed analysis that ties returns on tangible common equity to a relative premium to tangible book value and growth in tangible book value per share."

Mosby said he expected "STT to earn a 15% return on tangible common equity in 2013 with an estimated cost of equity around 10%," and said that "if STT can regenerate revenue growth coupled with some efficiency improvements, the valuations can begin to improve. "

STT Chart STT data by YCharts

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

3. Northern Trust
Shares of Northern Trust ( NTRS) of Chicago closed at $48.64 Monday, returning 25% year-to-date, following last year's 27% decline.

The shares trade for 1.8 times tangible book value, and for 14.5 times the consensus 2013 EPS estimate of $3.35. The consensus 2012 EPS estimate is $2.94.

Based on a quarterly payout of 30 cents, the shares have a dividend yield of 2.47%.

Northern Trust reported second-quarter net income of $179.6 million, or 73 cents a share, increasing from $161.2 million, or 66 cents a share in the first quarter, and $152 million, or 62 cents a share, during the second quarter of 2011.

The company's second-quarter ROA was 0.78%, increasing from 0.68% the previous quarter, and 0.66% a year earlier. The return on average equity was 9.91% during the second quarter, increasing from 9.04% in the first quarter, and 8.76% in the second quarter of 2011.

Northern Trust's second-quarter net interest income accounted for 26% of total revenue. The second-quarter net interest margin was 1.28%, increasing from 1.24% the previous quarter, and 1.23% a year earlier. Mosby estimates that Northern Trust's net interest margin will decline by eight basis points through the end of 2013.

Mosby rates Northern Trust a "Buy," and on Monday raised his price target for the shares by two dollars to $59, "due to the recent acceleration in efficiency gains." The analyst said that "NTRS has one of the strongest capital positions in our coverage, high long-term returns on capital, and a proven risk avoidance strategy," which has "historically created a good, low-risk long-term investment."

The analyst went on to say that "NTRS has over $20 billion in short-term investments, which could be deployed to earn at least 2% more in yield, or add roughly $1 in annualized earnings per share power," although "like the other trust banks, NTRS is exposed to changes in market valuations and revenue margins, which would be significantly unfavorably impacted by a near-term recession."

NTRS Chart NTRS data by YCharts

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

2. Bank of New York Mellon
Shares of Bank of New York Mellon ( BK) closed at $23.71 Monday, returning 21% year-to-date, following a 33% decline during 2011.

The shares trade for 2.3 times tangible book value, and for 10 times the consensus 2013 EPS estimate of $2.40. The consensus 2012 EPS estimate is $2.06.

Based on a quarterly payout of 13 cents, the shares have a dividend yield of 2.19%.

Bank of New York Mellon reported second-quarter net income applicable to common shareholders of $466 million, or 39 cents a share, including a litigation charge of $212 after tax, or 18 cents a share. Excluding the litigation charge, second-quarter operating earnings were 57 cents a share.

In comparison, the company reported earnings applicable to common shareholders of $619 million, or 52 cents a share, in the first quarter, and $735 million, or 59 cents a share, during the second quarter of 2011.

The company's second-quarter return on tangible common equity was 15.7%, declining from 21.0% the previous quarter, and 26.3% a year earlier.

Bank of New York Mellon's second-quarter net interest margin was 1.25%, narrowing from 1.32% in the first quarter, and 1.41% in the second quarter of 2011. Net interest income made up 20% of total second-quarter revenue.

Mosby estimates that the company will see its net interest margin contract by another three basis points through the end of 2013.

The analyst rates Bank of New York Mellon a "Buy," and on Monday raised his price target for the shares by a dollar, to $29, and said "We expect BK to earn a 22% return on tangible common equity in 2013 with an estimated cost of equity around 11%."

Mosby said that "while BK currently trades at a 142% premium to its 2012 year-end tangible book value as compared to an average 105% premium for the Trust Banks, our analysis suggests that BK's fundamental strength should warrant approximately a 165% premium," and also highlighted "WFC and BK as two Large Cap Banks that we believe still have significantly more upside potential with less than 20% downside risk if market perception begins to turn unfavorable again."

BK Chart BK data by YCharts

Interested in more on Bank of New York Mellon? See TheStreet Ratings' report card for this stock.

1. Regions Financial
Shares of Regions Financial ( RF) of Birmingham, Ala., closed at $7.39 Monday, returning 73% year-to-date, following a 38% decline last year.

The shares trade for 1.2 times tangible book value, and for nine times the consensus 2013 EPS estimate of 80 cents. The consensus 2012 EPS estimate is $71 cents.

Regions went through a major transition during the first half of 2012. During the second quarter, the company redeemed all $3.5 billion in preferred stock held by the government for bailout assistance received in 2008 through the Troubled Assets Relief Program, after selling its Morgan Keegan subsidiary and raising $900 million in common equity during the first quarter.

The company reported second-quarter earnings available to common shareholders of $284 million, or 20 cents a share, increasing from $145 million, or 11 cents a share during the first quarter, and $55 million, or four cents a share, during the second quarter of 2011. The second-quarter earnings were reduced by $71 million, or five cents a share, from the accelerated discount accretion on the redeemed TARP preferred shares.

The company's second-quarter net interest margin expanded to 3.16%, from 3.09% the previous quarter, and 3.07% a year earlier. Mosby estimates that Regions Financial's margin will expand by another nine basis points through the end of 2013.

Mosby rates Regions a "Buy," and on Monday raised his price target for the shares to $9.25 from $9.00, saying he expected the company to improve its "quarterly earnings run rate to above $0.20 before year-end, pushing potential upside substantially higher."

RF Chart RF data by YCharts

Interested in more on Regions Financial? 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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