M&T, Regions: Financial Winners

NEW YORK ( TheStreet) -- M&T Bank ( MTB) and Regions Financial ( RF) were the winners among the largest U.S. financial companies on Wednesday, with shares of both companies rising 2%.

M&T's stock closed at $98.63, while Regions closed at $7.55.

The broad indexes all pulled back after Chevron ( CVX) late on Tuesday provided an update on its financial results, saying that "earnings for the third quarter 2012 are expected to be substantially lower than second quarter 2012," as "upstream results are projected to be lower between sequential quarters, reflecting foreign exchange losses and lower liftings and realizations, partially offset by an asset sale gain," while downstream earnings are also expected to decline significantly, "reflecting the impact of negative timing effects, lower realized margins and the negative effects of several smaller unrelated items."

Chevron's stock was down over 4% to close at $112.45.

The Federal Reserve Wednesday afternoon released its October Beige Book survey, saying that "economic activity generally expanded modestly since the last report" in August, although "the New York District noted a leveling off in economic activity, and Kansas City indicated some slowing in the pace of growth."

The KBW Bank Index ( I:BKX) rose slightly to close at 50.91.

Leading into Friday's kickoff of earnings season for the largest banks with reports from JPMorgan Chase ( JPM) and Wells Fargo ( WFC), here are some focus points for investors, from Stifel Nicolaus analyst Christopher Mutascio, who has "Hold" ratings on both stocks:

While investors and analysts have been focused on JPMorgan's continued unwinding of the hedge positions that led to its $4.4 billion second-quarter trading loss and suspension of its common share buyback program (JPM still earned a cool $5 billion second-quarter profit), Mutascio is concerned about the company's net interest margin, "

"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."

A bank's net interest margin is the difference between its average yield on loans and investments and its average cost for deposits and borrowings. Most banks are seeing margins being squeezed, since the Federal Reserve's target federal funds rate has been in a range of between zero and 0.25% since late 2008, while the central bank in September increased its purchases of long-term mortgage-backed securities, in an attempt to push long-term rates down further, or at least keep them at their historically low levels.

Some banks that saw assets reprice more quickly during this cycle are better positioned to defend their margins or even see them expand, over the next year.

Among Mutascio's other concerns for JPMorgan Chase are the company's credit costs. "Overall, the company has been one of the more prudent banks within our coverage list in building up its loan loss reserve levels and not aggressively releasing them," the analyst said, but "in 2Q12 the company's loan loss provision expense was just 0.12% of average loans versus the 20-year median of approximately 1.00%," which "does not seem sustainable."

JPMorgan Chase has already requested Federal Reserve approval to resume its share buybacks before the next round of bank stress tests begin in the first quarter of 2013. Mutascio said that "although we are not overly optimistic that management will provide significant details regarding its expectations for next year's CCAR, we are interested in its body language."

For Wells Fargo, investors will be looking for additional comments from management about the federal government's mortgage fraud lawsuit. On the operating front, the company's net interest margin is of major concern to investors, as CFO Tim Sloan said at a conference last month 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."

With expectations for another very strong quarter for mortgage loan originations, Mutascio said "we would like to get a sense if the strength in mortgage banking can offset the potential for further net interest margin compression into 2013 - not just in 3Q12."

Stifel Nicolaus will also be looking "for any signs of traction in net loan growth (ability of new loan production to more than offset reduction in loan run-off balances) and additional cost saves," with the expectation that "refinance activity eventually slows from its current torrid pace."

M&T Bank


M&T Bank's shares have now returned 32% year-to-date, following a 9% decline during 2011.

The shares trade for 2.4 times their reported June 30 tangible book value of $40.52, and for 12 times the consensus 2013 earnings estimate of $7.78 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $6.91.

M&T in August agreed to acquire Hudson City Bancorp ( HCBK) of Paramus, N.J., for about $3.7 billion in stock and cash. The deal valued Hudson City at $7.22 a share, or 80% of its reported June 30 tangible book value of $9.08.

M&T Bank of Buffalo, N.Y., has $80.8 billion in total assets, and Hudson City has $43.6 billion in assets, with 135 branches, with 97 branches in New Jersey, 29 in New York, and nine in Fairfield County, Conn.

The U.S. Treasury on Aug. 17 completed a public offering of the $381.5 million in M&T TARP preferred shares held by the government. The preferred shares have a 5.00% coupon, which was originally scheduled to rise to 9.00% in February 2014 for the remaining $230 of the bank's original TARP bailout, with the coupon on the $151.5 million in assistance originally provided to Provident Bancshares rising to 9.00% in November 2013.

M&T on Aug. 20 proposed an innovative amendment -- which was later approved -- under which the dividend rate on all of the former TARP preferred shares will rise to 6.375% on November 15, 2013, with the company agreeing not to redeem the shares until Nov. 15, 2018. While this is significantly lower than the original reset rate of 9.00%, it was a good deal for all parties, because it enabled M&T to avoid repaying TARP over the next year, while providing the preferred shareholders an above-market dividend.

The company will announce its third-quarter results on Oct. 17, with a consensus EPS estimate of $1.85, increasing from $1.71 in the second quarter, and $1.32, during the third quarter of 2013.

M&T has been a good earnings performer, with an operating return on average assets of 0.97% and a return on tangible common equity of 13.63% for the 12-month period ended June 30, according to Thomson Reuters Bank Insight.

Credit Suisse analyst Craig Siegenthaler on Wednesday upgraded M&T Bank to an "Outperform" rating from a neutral rating, saying that "MTB's current valuation and consensus estimates are still not fully reflecting the EPS/TBV benefits from the HCBK acquisition," and that the company "may complete additional accretive acquisitions over the next few years."

The analyst added that "we look for MTB's premium valuation to hold and estimate upside to consensus '13/'14 EPS. Recall - while MTB's relatively rich valuation deters capital return through buy-backs, it does provide MTB with a strong currency as a regional consolidator in the Mid-Atlantic, and supports above-average dividend payouts and TBV growth."

Siegenthaler estimates that MTB will earn $7.43 a share for all of 2012, followed by EPS of $8.48 in 2013 and $9.05 in 2014.

MTB Chart MTB data by YCharts

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

Regions Financial


Shares of Regions Financial of Birmingham, Ala., have now returned 76% year-to-date, following a 38% decline during 2011.

The shares trade for 1.1 times their reported June 30 tangible book value of $6.69, and for 9.3 times the consensus 2013 EPS estimate of 81 cents. The consensus 2012 EPS estimate is 72 cents.

The consensus among analysts is for 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 TARP assistance, after selling its Morgan Keegan subsidiary and raising $900 million in common equity during the first quarter.

Jefferies analyst Ken Usdin rates Regions Financial a "Hold," with an $8.00 price target, and said on Oct. 2 that he expects the company's "pre-provision for loan losses earnings to come under higher scrutiny this quarter given that it is harder to impress on credit after last quarter's beat," when the company's provision for loan loss reserves was a very low $26 million, or just 0.14% of total loans.

"This could work against RF," Usdin said, "as 2Q had a number of one-timers that may not be teased out appropriately in Street models."

Guggenheim analyst Marty Mosby last month said that Regions was among the regional banks that were best-positioned to defend their net interest margins at this point in the economic cycle.

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 price target of $9.25 from $9.00. The analyst expects the company to improve its "quarterly earnings run rate to above $0.20 before year-end, pushing potential upside substantially higher."

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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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