Mortgage Refi Wave and Housing RecoveryIt is no surprise that President Obama's expansion early this year of the Home Affordable Refinance Plan or HARP -- allowing qualified borrowers with mortgage loans held by Fannie Mae ( FNMA) or Freddie Mac ( FMCC) to refinance their entire loan balances at historically low rates no matter how much the home values have declined -- has been a resounding success. Banks continue to benefit from the high volume of refinancing, not only from origination fees, but from "record
Mortgage PutbacksWhile the housing recovery is one of the most exciting banking themes, some major players still have to work through their legacy mortgage mess left over from the aggressive and creative mortgage lending and securitization they engaged in during the real estate bubble that ended in 2007. While Bank of America ( BAC) appears to have put the controversy over its acquisition of Merrill Lynch behind it, with last week's agreement to pay $2.43 billion to settle a class action lawsuit by investors, alleging that the company and "certain of its officers and directors" made misleading statements heading into the Merrill deal's completion in January 2009, the company still needs to turn the corner on mortgage repurchase demands. Total mortgage putback demands against the company -- mainly springing from former CEO Ken Lewis's decision to purchase Countrywide Financial in 2008 -- increased by 41% during the second quarter alone, to $22.7 billion, as of June 30. Investors will also be looking for indications on whether Bank of America is close to settling its long-term dispute with Fannie Mae, since the company and the government-sponsored mortgage giant disagree on "what constitutes a valid repurchase request," according to Bank of America CFO Bruce Thomson. The dispute has not only caused the putback request to increase, as BAC has refused to buy back Fannie Mae loans, it has caused the company to stop selling most newly originated mortgages to Fannie. Bank of America will announce its third-quarter results on Oct. 17, with analysts expecting the company to report third-quarter earnings of 14 cents a share, declining from 19 cents the during the second quarter, and 56 during a messy third quarter of 2011, when pretax earnings were boosted by $4.5 billion fair value adjustments on structured liabilities, a $3.6 billion gain from the sale of shares in China Construction Bank, and $1.7 billion in trading debit valuation adjustments (DVA), partially offset by $2.2 billion in losses "to private equity and strategic investments." Bank of America's shares closed at $8.97 Friday, returning 59% year-to-date, following a 58% decline during 2011. The shares trade for 0.7 times tangible book value, and for just 10 times the consensus 3013 EPS estimate of 91 cents. JPMorgan analyst Vivek Juneja on Friday reiterated his "Overweight" rating of Bank of America, with a said "we are establishing a December 2013 target of $11.50, which is based on 0.8x price to our YE 2013 tangible book value multiple, a 50% discount to expected peer median tangible book value multiple of 1.5x." A continuing theme that Bank of America CEO Brian Moynihan would love to have investors focus is cost savings. KBW analyst David Konrad, who rates the company "Market Perform," said on Tuesday that Moynihan's "Project New BAC" cost reduction initiatives "are just ramping up and we are only expecting $200 million to come in this quarter--but we are hopeful management can help investors walk through how the $17 billion to $18 billion per quarter current expense run rate should be $15 billion to $16 billion in the future." Konrad expects "a roughly in-line quarter" for Bank of America, but believes "investors could exit the call feeling better about the expense line. Lastly, we believe the capital ratios should improve slightly bolstering the view that BAC could get modest dividend increases and buyback authorization in the 2013
QE3 and Margin ContractionWith the target federal funds short-term rate in a range of zero to 0.25% since late 2008, most banks have already seen all of the benefit they are likely to see from a reduction in funding costs, while long-term rates have continued to be pressured, as the Federal Reserve has continued and increased its purchase of long-term mortgage-backed securities. The Federal Deposit Insurance Corp. reported that for the nation's nearly 7,000 banks and savings and loan associations, the aggregate net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed to 3.46% during the second quarter, from 3.52% the previous quarter, and 3.61% a year earlier. Guggenheim Securities analyst Marty Mosby said last month following the Fed's latest stimulus announcement that among the largest U.S. banks, 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." Wells Fargo CFO Tim Sloan said at a conference on Sept. 11 that the company's third-quarter net interest margin decline "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. The company trades at a premium to the remaining three members of the "big four" banking club, reflecting stronger earnings track record over the past few years, as well as the company' increasingly strong mortgage lending position. For the 12-month period ended June 30, Wells Fargo's operating return on average assets (ROA) was 1.30%, according to Thomson Reuters Bank Insight, while its return on average equity (ROE) was 11.57%. Wells Fargo's shares closed at $34.76 Friday, returning 28% year-to-date, following a 10% decline last year. The shares trade for twice their tangible book value, and for 9.5 times the consensus 2013 EPS estimate of $366. Mosby rates Wells Fargo a "Buy," with a $43 price target, "due to our continued expectation that WFC can produce consistent double-digit earnings per share growth." Deutsche Bank analyst Matt O'Connor on Tuesday downgraded Wells Fargo to "Hold" from a "Buy" rating, saying the bank "is best positioned for mortgage activity remaining stronger than expected given its market share of about one-third" and increasing gain spreads on mortgage sales, but "both of these are well known and we believe already reflected in the stock." Some banks that have already felt the worst effects of the decline in long-term rates on the asset side are set to buck the net interest margin trend, or at least see minimal contraction over coming quarters, including KeyCorp ( KEY) and Regions Financial ( RF).
Earnings PreviewsLeaving aside our beloved big four and the trust banks, here are earnings previews for the ten KBW Bank Index components trading lowest to consensus 2013 earnings estimates. The group is sorted by descending forward P/E ratio:
Shares of U.S. Bancorp ( USB) of Minneapolis closed at $34.16 Friday, returning 29% year-to-date, following a 2% return during 2011. The shares trade for 3.1 times their June 30 tangible book value, according to Thomson Reuters Bank Insight, and for 11.2 times the consensus 2013 earnings estimate of $3.04 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $2.84. Based on a quarterly payout of 19.5 cents, the shares have a dividend yield of 2.28%. U.S. Bancorp trades for the highest multiple to tangible book value among the 24 components of the KBW Bank Index, and this is explained in part by the company's earnings success. According to Thomson Reuters Bank Insight, the company's operating return on average assets (ROA) for the 12 months ended June 30 was 1.59%, while its operating return on equity (ROA) was 14.79%. The consensus among analysts is for USB to report a third-quarter profit of 73 cents a share, increasing from 71 cents during the second quarter, and 64 cents, during the third quarter of 2011. Oppenheimer analyst Chris Kotowski has a neutral rating on U.S. Bancorp, and said on Thursday that "USB is a steady business with stable, high quality predictable earnings, and usually the line items all fall within more or less predictable ranges," and noted that "this company hasn't reported a downtick in earnings since 2Q09." USB data by YCharts
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Shares of BB&T Corp. ( BBT) of Winston-Salem, N.C., closed at $33.10 Friday, returning 34% year-to-date, following a 2% decline during 2011. The shares trade for 2.2 times tangible book value, and for 10.9 times the consensus 2013 EPS estimate of $3.04. The consensus 2012 EPS estimate is $2.76. Based on a quarterly payout of 20 cents, the shares have a dividend yield of 2.42%. For the 12-month period ended June 30, BB&T's ROA was 0.97%, while the company's ROE was 9.33%. The analyst consensus is for BB&T to report a third-quarter profit of 70 cents a share down from 72 cents the previous quarter, but increasing from 52 cents a year earlier. BB&T on July 31 completed its acquisition of BankAtlantic, bringing on roughly $1.8 billion in loans and $3.5 billion in deposits, and over 70 Florida branches. JPMorgan Chase analyst Vivek Juneja has a neutral rating on BB&T, with a price target of $36.50, saying on Friday that the company "is growing revenues solidly led by faster loan and deposit growth and
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Huntington Bancshares ( HBAN) of Columbus, Ohio, has seen its stock return 28% year-to-date, through Friday's close at $6.90. The shares declined 19% during 2011. The shares trade for 1.3 times tangible book value, and for 10.4 times the consensus 2013 EPS estimate of 66 cents. The consensus 2012 EPS estimate is also 66 cents. Based on a quarterly payout of four cents, the shares have a dividend yield of 2.32%. For the 12-month period ended June 30, Huntington's ROA was 1.04%, while the company's ROE was 10.37%. Analysts polled by Thomson Reuters expect Huntington to report third-quarter EPS of 17 cents, matching the second-quarter results, and increasing a penny from the third quarter of 2011. Investors will be expecting the company to show continued strong loan growth, as well as continuing defense of its net interest margin, through additional growth of noninterest-bearing checking account deposits. Jefferies analyst Ken Usdin rates Huntington a "Buy," with a $7.50 price target, saying on Tuesday that "it is unclear whether consensus still has an auto securitization gain baked into 3Q results (the $1B transaction is to close in October, with the gain to be recognized in 4Q." Usdin added that Huntington's "third quarter should reflect continued progress on strategic initiatives, and we forecast better operating leverage on a Y-Y basis. We expect solid revenue growth driven by strong loan growth (we model EOP +2%, ex. HFS), relative NIM stability, and broad-based strength in fee income (service charges, mortgage, trust, capital markets)." HBAN data by YCharts
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Shares of KeyCorp of Cleveland closed at $8.81 Friday, returning 16% year-to-date, following a 12% decline last year. The shares trade just below tangible book value, and for 10.2 times the consensus 2013 EPS estimate of 86 cents. The consensus 2012 EPS estimate is 85 cents. Based on a quarterly payout of five cents, the shares have a dividend yield of 2.27%. For the 12-month period ended June 30, the company's ROA was 1.06%, while its ROE was 8.46%. The consensus among analysts is for KeyCorp to report third-quarter earnings of 21 cents a share, down from 24 cents the previous quarter, and 22 cents a year earlier. KeyCorp is well-positioned in the wake of the Federal Reserve's latest move to push long-term rates even lower, as the company has already felt the bulk of its pain from asset repricing. The company's second-quarter net interest margin narrowed to 3.06%, from 3.16% the previous quarter, and 3.19% a year earlier. Credit Suisse analyst Craig Siegenthaler has a neutral rating on KeyCorp, with a $9 price target, saying last month that "We look for 3Q12 and 4Q12 EPS to beat market expectations, and believe investors will increase EPS estimates for 2013/2014" before the end of the year. Siegenthaler expects KeyCorp's core net interest margin (NIM) "to experience the largest improvement in the industry given (1) significant debt retirement and refi activity since June, (2) significant CD repricing in 3Q12," and the acquisition of $725 million in Key-branded credit card assets from Elan Financial Services, taking on about 400,000 consumer and business accounts. KEY data by YCharts
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Shares of First Niagara Financial Group ( FNFG) of Buffalo, N.Y., closed at $8.07 Friday, down 4% year-to-date, following a 35% decline during 2011. The shares trade for 1.6 times tangible book value, and for 10.2 times the consensus 2013 EPS estimate of 79 cents. The consensus 2012 EPS estimate is 72 cents. Based on a quarterly payout of eight cents, the shares have a dividend yield of 3.97%. For 12 months through June 30, First Niagara's ROA was 0.47%, while the company's ROE was 3.38%. The analyst consensus is for First Niagara to report third-quarter earnings of 18 cents, increasing from a five-cent loss during the second quarter, but down slightly from 19 cents during the third quarter of 2011. During the second quarter, First Niagara completed its deal to acquire roughly 200 branches from HSBC ( HBC), while divesting about 100 branches, leading to an $18.5 million net loss, including about $135 million in extraordinary expenses and restructuring charges. Moving ahead, investors will be looking for significant efficiency improvements and organic growth initiatives, now that the complicated branch deal has been completed. Deutsche Bank analyst Dave Rochester rates First Niagara a "Buy," with a $9.50 price target, saying last month that "we continue to expect the valuation differential between FNFG shares and the mid cap banks to shrink over time as earnings visibility and investor sentiment improve, driving solid upside over the next year, but we note much of this upside could take time to develop, and is largely predicated on management's ability to consistently hit guidance and deliver on its organic growth strategy." The analyst added that "FNFG recently indicated it could begin to increase the dividend as early as next year. Although we would expect any potential hike in FY13 (if it were to occur) would likely be small and occur later in the year, it would still signal management's longer-term commitment to rebuilding this level." FNFG data by YCharts
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Shares of SunTrust ( STI) of Atlanta closed at $28.26 Friday, returning 61% year-to-date, following a 40% decline during 2011. The shares trade for 1.2 times tangible book value, and for 10.1 times the consensus 2013 EPS estimate of $2.81. The consensus 2012 EPS estimate is $3.31. Based on a quarterly payout of five cents, the shares have a dividend yield of 0.71%. For the 12-month period ended June 30, the company's ROA was 0.46%, and its ROE was 4.00%. The consensus among analysts is for SunTrust to report a third-quarter profit of $1.83 cents (including several extraordinary items), increasing from 50 cents the previous quarter, and 39 cents a year earlier. SunTrust on Sept. 6 announced a number of steps to optimize its balance sheet, in light of new regulatory and take advantage of its long-term investment in Coca Cola ( KO) shares. The company accelerated two forward purchase agreements to sell its Coke shares, while also transferring $3 billion in portfolio loans to held-for-sale, and said that the moves, along with other actions, would lead to a pretax third-quarter gain of $1.9 billion, or $1.2 billion after taxes. Juneja rates SunTrust "Overweight," and on Friday raised his price target for the shares to $33.50 from $31.50, and called the company "one of the biggest beneficiaries from housing market recovery," as it "has had an unusually large drag from mortgage related issues on several fronts versus peers." "As the housing market recovers, SunTrust's earnings should show strong benefit," Juneja said. "In addition, we expect management to remain focused on lowering expenses and improving
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Shares of Fifth Third Bancorp ( FITB) of Cincinnati closed at $15.51 Friday, returning 24% year-to-date, following an 11% decline during 2011. The shares trade for 1.4 times tangible book value, and for 9.8 times the consensus 2013 EPS estimate of $1.58. The consensus 2012 EPS estimate is $1.59. Based on a quarterly payout of 10 cents, the shares have a dividend yield of 2.58%. Fifth Third's ROA for the 12-month period ended June 30 was 1.29%, while the company's ROE was 11.15%. Analysts polled by Thomson Reuters expect Fifth Third to report third-quarter EPS of 38 cents, declining from 40 cents the previous quarter and also a year earlier. The company in August announced that the Federal Reserve had approved its revised 2012 capital plan, including an increase in the quarterly dividend to 10 cents a share from eight cents, and "new share repurchase authorization of up to 100 million shares," including up to $600 million in buybacks through the first quarter of 2013. KBW analyst David Konrad on Monday downgraded Fifth Third to a "Market Perform" rating, from "Market Perform," while maintaining his price target of $17, saying "we have limited upside to our price target," and that "although the stock is trading at a modest discount to its peers on 2013 earnings (9.7x versus 11.0x), FITB is trading at a modest premium to its peers on earnings after excluding the benefits of reserve releases in our estimates (11.3x versus 11.1x)." During the third quarter, "FITB's stock is up 19% compared to 12% for large regional bank peers," Konrad said, adding that "as a result, FITB's 2013 multiple, excluding reserve release, has improved this quarter from 9.8x to 11.3x, or to a modest premium to peers." The analyst also said that "we believe FITB has minimal credit leverage going forward," meaning minimal reserve releases, and that "given the challenging rate environment and meaningful benefits from liabilities repricing occurring through this quarter, we anticipate NIM pressure may hold back earnings growth in 2013." Wells Fargo analyst Matthew Burnell followed suit, downgrading Fifth Third on Tuesday to a "Market Perform" rating from "Outperform," to reflect "a more evenly matched risk/reward relationship." Burnell also said that "commercial loan growth trends, which have been robust through most of this year, are beginning to flag which could have a bigger effect on FITB than peers," and that the Fed's approval of the revised capital plan and the associated dividend hike and buyback plan announcement "have now been completed and announced, and appear to be largely incorporated into FITB's current share price." Burnell raised his 2012 EPS estimate by four cents to $1.59, to reflect the share repurchases, while lowering his 2013 EPS estimate by a penny, to $1.64. The analyst also introduced a 2014 EPS estimate of $1.70. FITB data by YCharts
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Shares of PNC Financial Services Group ( PNC) of Pittsburgh closed at $63.83, returning 11.5% year-to-date, following a 3% decline during 2011. The shares trade for 1.3 times tangible book value, and for 9.3 times the consensus 2013 EPS estimate of $6.83. The consensus 2012 EPS estimate is $5.68. Based on a quarterly payout of 40 cents, the shares have a dividend yield of 2.51%. For the 12 month period ended June 30, PNC's ROA was 0.92%, while the company's ROE was 6.87%. The consensus among analysts is for PNC to report a third-quarter profit of $1.59, increasing from 98 cents during the second quarter (when the company booked extraordinary charges of 54 cents a share for mortgage putback reserves 16 cents for trust preferred share redemptions an six cents for restructuring), and $1.55, during the third quarter of 2011. Juneja rates PNC "Overweight," with an $80 price target, saying on Friday that his rating reflects the company's "attractive valuation and multiple drivers of revenue growth." "PNC is expanding its business through recent acquisitions of
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Shares of Regions Financial of Birmingham, Ala., closed at $7.27 Friday, returning 68% year-to-date, following last year's 38% decline The shares trade for 1.1 times tangible book value, and for 9.1 times the consensus 2013 EPS estimate of 80 cents. The consensus 2012 EPS estimate is 71 cents. For the 12-month period ended June 30, the company's ROA was 0.13%, while its ROE was 1.07%. Analysts polled by Thomson Reuters expect the company to report third-quarter EPS of 21 cents, increasing from 20 cents the previous quarter, and eight cents a year earlier. 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 (TARP), after selling its Morgan Keegan subsidiary and raising $900 million in common equity during the first quarter. 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 the margin will expand by another nine basis points through the end of 2013. Mosby rates Regions a "Buy," with a $9.25 price target, and said last month that he expected the company to improve its "quarterly earnings run rate to above $0.20 before year-end, pushing potential upside substantially higher." RF data by YCharts
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Shares of Capital One Financial ( COF) of McLean, Va., closed at $56.96, returning 35% year-to-date, following a flat return during 2011. The shares trade for 1.6 times tangible book value, and for 8.2 times the consensus 2013 EPS estimate of $6.94. The consensus 2012 EPS estimate is $6.16. For the 12-month-period ended June 30, Capital One's ROA was 1.00%, while the company's ROE was 7.70%. The consensus among analysts is for Capital One to report a third-quarter profit of $1.65, increasing from 16 cents during the second quarter, when the company set aside reserves for the $27 billion U.S. credit card portfolio it acquired from HSBC ( HBC), and also agreed to pay $210 million in refunds and fines, after entering into a settlement with regulators over the marketing of credit protection products. During the third quarter of 2011, the company earned $1.77 a share. While Capital One's acquisitions over the years have pushed the company in different directions, the company's shoring up of its liquidity with the purchase of ING Direct early this year, followed by the HSBC card purchases, pushes the company further back toward its core competency. Guggenheim analyst David Darst rates the company a "Buy," with a $67 price target, and said last month that "COF is in a prime competitive position to benefit from a consumer shift to direct banking, given its product set, early adopter customer base, and national brand," and that his "$7.00 earnings estimate for 2013 assumes COF generates a 15%
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