Big Bank Stocks: Financial Losers

NEW YORK ( TheStreet) -- Regions Financial ( RF) was the loser during a weak Friday session for the largest U.S. banks, with shares declining 4.5% to close at $7.28.

While the broad indexes ended mixed, the KBW Bank Index ( I:BKX) was down 2.5% to close at 50.00, with all 24 index components closing out the week with declines.

JPMorgan Chase ( JPM) kicked off bank earnings season by soundly beating the consensus third-quarter earnings estimate of $1.24 a share, with a profit of $5.7 billion, or $1.40 a share.

Earnings increased from $5.0 billion, or $1.21 a share, during the second quarter, when the company booked a $4.4 billion trading loss, from the hedging activity of its Chief Investment Office (CIO), and $4.3 billion, or $1.02 a share, during the third quarter of 2011.

The company's top-line net revenue figure was $25.1 billion was also a convincing beat of the consensus estimate of $24.5 billion.

The third-quarter results were padded by a $967 million reserve release, compared with a $2.1 billion release during the second quarter -- quite timely, considering the CIO losses -- and a release of only $170 million during the third quarter of 2011.

JPMorgan Chase's nonaccrual loans increased to 1.57% of total loans as of Sept. 30, from 1.38% the previous quarter, while third-quarter net charge-offs -- loan losses less recoveries -- totaled $2.8 billion during the third quarter, or an annualized 1.53% of average retained loans. The net charge-off ratio increased from 1.27% the previous quarter, and 1.44% a year earlier, but reserve coverage was very much "ahead of the pace" of charge-offs, covering 2.61% of total loans as of Sept. 30.

CFO Douglas Braunstein explained during the company's earnings call with analysts that loan losses and nonaccrual loans both increased because of regulatory guidance requiring that loans whose borrowers had gone through Chapter 7 bankruptcy and were in early stages of delinquency, with payments less than 60 days late, "be written down to collateral value."

JPMorgan's estimated Basel III Tier 1 capital ratio increased to a strong 8.4% as of Sept. 30, increasing from 7.9% the previous quarter. After saying in September that the company was hoping to restart its share buybacks in the first quarter of 2013, CEO James Dimon said during the company's earnings call with reporters that resuming buybacks that quickly would be "immaterial," since only $3 billion in shares would be repurchased.

Stifel Nicolaus analyst Christopher Mutascio -- who rates JPMorgan a "Hold," estimated that JPMorgan's core operating EPS was "closer to $1.34," when factoring out one-time items. The analyst's third-quarter operating estimate for JPMorgan was $1.38, but excluding "the securities gains embedded in our estimate, our core EPS estimate would have been $1.15," he said," which would be "a better apples-to-apples comparison to the core EPS of $1.34 the company reported in 3Q12," making JPMorgan's operating earnings beat even more solid.

The analyst said that the earnings beat mainly reflected "mortgage banking revenues came in $450 million higher than we anticipated due to strong origination volume ($0.08 per share)," investment banking fees at $260 million higher than his estimate, for five cents a share, and "a slightly lower tax rate than we expected ($0.03 per share)."

In its "Read-Across for Financial Sub-sectors," KBW tied JPMorgan's results into expectations for Bank of America ( BAC), which will announce its third-quarter results on Monday.

KBW analyst Frederick Cannon said that based on JPMorgan's "strong quarter of mortgage originations (up 8% QoQ) of $47.3B, while retail channel originations declined 2%... we expect the upside potential to BAC's mortgage numbers to be on the small side at $100-$200M, given that JPM's positive results in 2Q12 did not seem to translate into significant upside to BAC's quarterly results, which we believe is representative of BAC's recent market share declines."

Bank of America will announce its third-quarter results on Oct. 17.

KBW analyst David Konrad rates JPMorgan "Outperform," with a $49 price target, while KBW analyst Jefferson Harralson rates Bank of America "Market Perform," with a $10 price target.

Commenting about mortgage repurchase demands, Cannon said that JPMorgan's mortgage putback "reserve was up from 2Q's $36M number, and while still well below trends of the previous year, it does seem to somewhat contrast last quarter's statement that it was substantially compete with reserving. This increase gives us slight pause as we extrapolate to BAC's likely reserve but we feel that it is more likely that we see BAC's rep and warranty reserve come in below our $400M estimate in the quarter given JPM's low overall reserve level."

JPMorgan's shares declined pulled back over 1% to close at $41.62.

Wells Fargo

Shares of Wells Fargo were down 3% to close at $34.25, after the company reported third-quarter earnings of $4.94 billion, or 88 cents a share, beating the consensus estimate by a penny, on continued strong mortgage loan revenue.

Total revenue for the third quarter was $21.2 billion, also slightly ahead of the consensus estimate.

Investors may have been disappointed that Wells Fargo's net interest margin narrowed even further than they may have expected after CFO Tim Sloan said at a conference last month that 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."

Wells Fargo's third-quarter net interest margin was 3.66%, narrowing by 25 basis points from 3.91% the previous quarter, and 3.84%, a year earlier.

During the company's conference call with analysts, Sloan said that the company's "operating losses were down $243 million on lower litigation accruals," and that "our litigation reserves consider all litigation matters we are aware of including the recently announced FHA lawsuit.

Expense reduction is a continuing theme for Wells Fargo, and the company's efficiency ratio -- essentially, the number of pennies of overhead expenses for each dollar of revenue -- improved to 57.1 during the third quarter, from 58.2 in the second quarter, and 59.5, during the third quarter of 2011.

The company's second-quarter return on average assets was a strong 1.45% and its return on equity was 13.38%, both increasing slightly from the previous quarter.

Jefferies analyst Ken Usdin said that Wells Fargo's "expenses looked fine, declining $285mm Q-Q," with the efficiency ratio "right in the middle of the company's longer-term target of 55%-59%."

Usdin said that "greater-than-expected net interest margin decline is a result of strong deposit growth and a relatively conservative reinvestment strategy (average short-term investments up about $20B)," and that "given the magnitude of NIM compression, net interest income declined just under $400mm ($10,820mm vs. $11,213mm in 2Q)."

Usdin rates Wells Fargo a "Buy," with a price target of $39.00.


Shares of Regions Financial have now returned 70% year-to-date, following a 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 nine times the consensus 2013 EPS estimate of 81 cents. The consensus 2012 EPS estimate is 72 cents.

The Birmingham, Ala., lender will announce its third-quarter results on Oct. 23, with a consensus EPS estimate of 21 cents, increasing from 20 cents the previous quarter, and eight cents a year earlier.

Analysts will be looking for a relatively "clean quarter" for the company, after a major transition during the first half of 2012. During the second quarter, Regions redeemed all $3.5 billion in preferred stock held by the government for bailout assistance through the Troubled Assets Relief Program, or TARP, after selling its Morgan Keegan subsidiary and raising $900 million in common equity during the first quarter.

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. The analyst expects 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.


-- 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 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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