Citi's shares closed at $34.60 Tuesday, returning 32% year-to-date, following a 44% decline during 2011. The shares trade for 0.7 times their reported June 30 tangible book value of $51.81, and for 7.6 times the consensus 2013 earnings estimate of $4.55. The consensus 2012 EPS estimate is $4.07. For the 12-month period ended June 30, Citigroup's operating return on average assets (ROA) was 0.55%, while the company's return on average tangible common equity (ROE) was 7.22%, according to Thomson Reuters Bank Insight. Citigroup will announce its third-quarter results next Monday. The consensus among analysts is for the company to report a profit of 96 cents, declining from a dollar a share in the second quarter (excluding credit and debit valuation adjustments), and $1.23 during the third quarter of 2011. Penala's price target for Citigroup is $45, offering "the most potential upside" among the large-cap bank stocks she covers. The company is "one of the more misunderstood banks," she said, "in that investors view outsized risk in its international operations and overlook its EPS leverage to a US housing recovery." Citigroup CEO Vikram Pandit's long-term "good bank/bad bank" strategy for Citigroup is to pursue growth in the company's international operations, while placing noncore assets -- including the company's 49% stake in the Morgan Stanley Smith Barney joint venture, which the company is selling to Morgan Stanley ( MS) -- within the Citi Holdings subsidiary, and allowing them to run off. Penala said that within Citi Holdings "is a $100bn residential first mortgage and home equity portfolio (15% of total loans), $6.9bn of nonperforming loans (NPLs), and 9.3% reserve/loans ratio," illustrating that the runoff subsidiary has much to gain from a housing recovery, and also has plenty of excess reserves, which can eventually be recaptured in earnings. "Over time, we expect C to return 25% of market cap to shareholders," through dividends and share buybacks, the analyst said. Penala also said that "a housing recovery could mean improving inflows of new defaults and better than expected realized values on the residential portfolio, accelerating credit leverage to EPS," and that "if housing continues to recover, we believe portfolio managers looking to increase weight in banks will invest in C incrementally given fair values at regionals and underweight positioning in C." C data by YCharts
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JPMorgan closed at $41.38 Tuesday, returning 28% year-to-date, following a 20% decline during 2011. The shares trade for 1.2 times tangible book value, and for 7.9 times the consensus 2013 EPS estimate of $5.22. The consensus 2012 EPS estimate is $4.76. Based on a quarterly payout of 30 cents, the shares have a dividend yield of 2.90%. For the 12-month period ended June 30, JPMorgan's ROA was 0.79% and its ROE was 11.32%. JPMorgan Chase will kick off earnings season for large banks on Friday, with a consensus EPS estimate of $1.21, matching the company's second-quarter results, and increasing from $1.02 during the third quarter of 2011. Penala's price target for JPMorgan Chase is $48. The shares have recovered most of the value they lost following CEO James Dimon's announcement in late May that the company was facing large second-quarter losses from trading activities within its Chief Investment Office. JPMorgan announced soon after that it was suspending its share buyback program, but after the company achieved a $5 billion second-quarter profit, despite $4.4 billion in hedge trading losses, Dimon said that the company might be able to resume buybacks in the fourth quarter, subject to Federal Reserve approval. Penala said that "the resumption of share buybacks in 1Q13 and '13 stress test approval should re-establish JPM as a capital return story." The analyst added that "over the next 2 years, we estimate JPM will return 20% of market cap to investors." Penala also sees JPMorgan Chase benefiting from market rotation, as portfolio managers "incrementally invest in money centers like JPM given full valuations at regionals." KBW analyst Frederick Cannon on Wednesday followed a similar theme of a bottoming for capital markets revenue, estimating that JPMorgan Chase will report "fairly solid results out of the investment bank," with fixed income trading revenue increasing to $3.525 billion from $3.490 billion in the second quarter, although the analyst also expects "a modest decline in equity trading to $930 million from $1,043 million in 2Q12." Cannon also expects "investment Banking fees to improve modestly linked quarter at $1,275 million (up 23% year over year) driven by strong debt underwriting of $700 million ($639 million last quarter)." "For JPM, we are forecasting two non-operating items in the quarter, a $900 million swap termination gain and $450 million DVA charge, so we expect reported EPS ($1.33), to be above operating EPS ($1.25)," Cannon said. He rates JPMorgan "Outperform," with a $49 price target. Stifel Nicolaus analyst Christopher Mutascio expressed concerns on Wednesday over JPMorgan's net interest margin, which is the difference between the average yield on loans and investments and the average cost for deposits and borrowings. Mutascio said that despite the focus on JPMorgan's unwinding of the hedge positions that lead to its second-quarter trading losses, we are more focused on the company's net interest margin as net interest income still makes up roughly 50% of the company's total revenue base (versus roughly 10% for trading)." "During 2Q12 the company's net interest margin compressed 14 basis points to 2.47%, resulting in a 4.2% ($496 million) sequential quarter decrease in net interest income," Mutascio said, and while "management has indicated the 2Q12 margin compression was not driven by the de-risking of the balance sheet in the aftermath of the London trading issues, we would have greater confidence in our 2013 EPS estimate if we were to see the margin stabilize in 3Q12. Without stabilization, we believe the risk to the consensus earnings expectations would be to the downside." Stifel Nicolaus rates JPMorgan Chase a "Hold." JPM data by YCharts
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U.S. Bancorp of Minneapolis has seen its shares return 31% year-to-date, through Tuesday's close at $34.68. During 2011, the shares returned 2%, which was a strong showing, during a year in which the KBW Bank Index declined 25%. The shares trade for 2.9 times tangible book value, and for 11.4 times the consensus 2013 EPS estimate of $3.05. The consensus 2012 EPS estimate is $2.85. With a quarterly payout of 20 cents, the shares have a dividend yield of 2.31%. The company has earned Penala's label as "best in class," with an ROA of 1.59% for the 12-month period ended June 30, and an ROE of 22.01%, which was the strongest among the 24 components of the KBW Bank Index. U.S. Bancorp will report its third-quarter results on Oct. 17, with a consensus EPS estimate of 73 cents, increasing from 71 cents in the second quarter, and 64 cents during the third quarter of 2011. Penala downgraded U.S. Bancorp to a neutral rating from a "Buy" rating, while lowering her price target for the shares to $35 from $37, "as we believe that USB's above average valuations will come under pressure based on a declining
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Fifth Third Bancorp
Shares of Fifth Third Bancorp of Cincinnati closed at $15.86 Tuesday, returning 27% year-to-date, following an 11% decline during 2011. The shares trade for 1.3 times tangible book value, and for 10 times the consensus 2013 EPS estimate of $1.58. The consensus 2012 EPS estimate is $1.61. Fifth Third pays a quarterly dividend of 10 cents a share, for a yield of 2.52%. For the 12-month period ended June 30, the company's ROA was 1.29%, while its ROE was 14.01%. Fifth Third will announce its third-quarter results on Oct. 18, with a consensus EPS estimate of 38 cents, declining from 40 cents the previous quarter and also a year earlier. Penala downgraded Fifth Third to a neutral rating from a "Buy" rating, with a price target of $16.50, saying "we see few near term catalysts and believe that valuations reflect the approx. $1bn in after-tax gains that FITB can potentially realize from the sale of its remaining stake in Vantiv and subsequently deploy this toward buying back shares." Fifth Third's shares have risen 19% since the end of the second quarter, and the company's near-term capital return potential is quite visible. "By contrast, capital return expectations are far more muted for money center banks," Penala said, "and investors that prefer to continue to invest in this theme will find more upside in C and JPM, in our view, than at regional banks generally." FITB data by YCharts
Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock. -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn