Big Banks: Housing and Earnings Winners

NEW YORK ( TheStreet) -- Most bank stocks were strong on Wednesday, driven by strong housing numbers, while the broad indexes saw only slight gains.

Shares of IBM ( IBM) and Intel ( INTC) both declined sharply as their third-quarter results underlined the decline in PC sales.

Meanwhile, shares of Bank of America ( BAC) were down two cents to close at $9.44, after the company reported a small profit, as several items preannounced in September took their toll, including a pretax charge of $1.6 billion from an agreement to settle a 2009 lawsuit with investors related to the acquisition of Merrill Lynch, in addition to a charge of $800 million related to changes in the UK corporate tax rate, and $ $1.9 billion in debit valuation adjustments (DVA) and fair value option (FVO) adjustments.

The above items all matched the preannounced numbers, and Bank of America reported third-quarter net income of $340 million, breaking even on a per-share basis, and beating the consensus estimate of a seven-cent loss, among analysts polled by Thomson Reuters.

Following Bank of America's earnings release, Stifel Nicolaus analyst Christopher Mutascio wrote that the company's better-than-expected results were mainly driven by "1) better than expected mortgage banking revenues of $2.02 billion (versus our estimate of $1.58 billion) 2) better than expected investment banking revenues of $1.34 billion (versus our estimate of $1.09 billion) 3) lower than expected provision expenses of $1.77 billion (versus our estimate of $2.13 billion), and 4) $339 million in investment securities gains."

Mutascio said that the above items added nine cents to BAC's bottom line. The analyst rates Bank of America a "Hold."

The U.S. Census Bureau reported that estimated housing starts during November increased to a seasonally adjusted annualized rate of 872,000, which was a 15% increase from an upwardly revised 758,000 in August. The pace of housing starts in September increased 35% from September 2011.

The Census Bureau also reported that estimated housing permits increased to an annualized rate of 894,000 during September, increasing 11% from the previous month, and a whopping 45% from a year earlier.

the KBW Bank Index ( I:BKX) rose 2% to close at 51.06, with all but four of the 24 index components showing gains for the session.

Mayo Flips on Citi


One day after former Citigroup ( CEO) CEO Vikram Pandit abruptly resigned, after which CLSA analyst Mike Mayo said "the hand-off could not be more awkward for investors to digest - it is tough to get more positive on this stock on this information alone," the analyst changed his tune.

Following a conference call late on with analysts by Citigroup Chairman Mike O'Neill and new CEO Michael Corbat, Mayo on Wednesday upgraded Citi to an "Outperform" rating from "Underperform," while raising his price target for the shares to $43 from $31.00.

Mayo was impressed by the presentation by O'Neill and Corbat, and said that "a new three-year plan holds out hope for more restructuring, akin to actions taken by the Chair in his past jobs," and that "dividend reinstatement seems near-certain given mending of the regulatory credibility gap."

The analyst said that "notwithstanding this poor transition, we can think of no better person as chairman of Citi than Michael O'Neill, who led the way with using economic value added concepts in the late 1990s when he restructured legacy Bank of America," and that O'Neill "was one of the first adopters of what we then termed 'addition by subtraction', or eliminating subpar businesses to add to returns. If there was ever a company where this could be successful, it is Citigroup today."

Mayo's estimated "sum-of-the-parts" valuation for Citigroup is $52 a share.

Citi's shares rose over 3% to close at $38.43. The shares have now returned 46% year-to-date, following a 44% decline during 2011.

The shares trade for 0.7 times their reported Sept. 30 tangible book value of $52.70, and for eight times the consensus 2013 EPS estimate of $4.63.

C Chart C data by YCharts

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

M&T Bank


Shares of M&T Bank ( MTB) of Buffalo, N.Y., rose 6% to close at $103.07, after the company reported third-quarter net income available to common shareholders of $273.9 million, or $2.18 a share, blowing past the consensus EPS estimate of $1.85, and increasing from $1.71 in the second quarter, and $1.32 during the third quarter of 2011.

Tax-adjusted net interest income totaled $669 million in the third quarter, increasing from $655 million the previous quarter, and $616.7 million a year earlier. The company bucked the industry trend, with its net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- widening to 3.77% during the third quarter, from 3.74% in the second quarter, and 3.68% during September of last year.

M&T's noninterest income increased to $445.7 million during the third quarter, from $391.7 million the previous quarter and $368.4 million a year earlier, with a large increase in mortgage revenue and lower impairment charges. The year-over-year improvement was partially offset by a decline in service charges on deposits accounts, with the Federal Reserve making the Durbin Amendment's cap on debit card interchange fees effective during the fourth quarter of 2011. The quarter-over-quarter improvement was partially offset by a decline trust income.

With the wave of home refinancing continuing, M&T reported third-quarter mortgage banking revenue of $106.8 million, increasing from $69.5 million the previous quarter, and $38.1 million a year earlier.

M&T's earnings improvement also reflected a significant reduction in expenses, "predominantly due to the integration of the operations obtained in the May 2011 acquisition of Wilmington Trust Corporation." Third-quarter noninterest expenses totaled $616.0 million, declining from $627.4 million during the second quarter, and $662.0 million, during the third quarter of 2011.

The company's third-quarter return on average assets was 1.45% and its return on average common equity was 12.40%.

The company 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.

Jefferies analyst Ken Usdin rates M&T Bank a "Hold, " with a $96 price target, and said that the company's third quarter was "solid across the board, " as "most core drivers were better-than-expected.

"Overall, it's tough to poke any holes in 3Q results," Usdin said, "as core EPS easily beat estimates on a solid net interest income (NII) trajectory, higher mortgage banking fees, lower expenses, and improved credit quality."

With a Tier 1 common equity ratio of 7.47%, Usdin said that "MTB's capital ratios remain among the lowest in the group, but capital accretion from the HCBK merger and relatively better profitability should help close the gap over time," and said he expected the Hudson City acquisition to "add 30bp-40bp to regulatory ratios at close (expected in 2Q13)."

M&T's shares have now returned 38% year-to-date, following a 9% decline during 2011. The shares trade for 13 times the consensus 2013 EPS estimate of $7.80.

Based on a quarterly payout of 70 cents, M&T's shares have a dividend yield of 2.72%, that is very well supported by earnings.

MTB Chart MTB data by YCharts

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

Bank of New York Mellon


Shares of Bank of New York Mellon ( BK) rose 5.5% to close at $24.86, after the trust and custody giant reported third-quarter earnings applicable to common shareholders of $720 million, or 61 cents a share, beating the consensus estimate of a 54-cent profit, among analysts polled by Thomson Reuters.

Earnings increased from 466 million, or 39 cents a share, during the second quarter (which included a $212 (18 cents a share) after-tax litigation charge), and $651 million, or 53 cents a share, during the third quarter of 2011.

Third-quarter revenue also came in ahead of expectations, totaling $3.675 billion, increasing from $3.579 billion the previous quarter, and $3.683 billion, a year earlier.

The company's third-quarter return on tangible common equity was a strong 22%.

Bank of New York Mellon bought back $288 worth of common shares during the third quarter, and the company's estimated Basel III Tier 1 common equity ratio was a solid 9.3% as of Sept. 30.

Jefferies analyst Ken Usdin called the company's third-quarter results a "decent beat" that was "supportive of the 2013 consensus," and said that although "some may view the run-rate as unsustainable given overearning in fixed income/seed capital gains, we peg the EPS run-rate as no worse than the mid-$0.50's."

Usdin estimated that excluding one-time items, Bank of New York Mellon's third-quarter operating profit was 57 cents a share, and noted that "investment & other income and FX & other (driven by fixed income trading) came in much stronger than expected, which may not be sustainable."

Usdin rates Bank of New York Mellon a "Hold," with a $25 price target.

Bank of New York Mellon's shares have now returned 27% year-to-date, following a 33% decline during 2011.

The shares trade for 10.5 times the consensus 2013 EPS estimate of $2.38. Based on a quarterly payout of 13 cents, the shares have a dividend yield of 2.09%.

BK Chart BK data by YCharts

Interested in more on Bank of New York Mellon? 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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