5 Bank Stocks Ready to Rise With the Housing Recovery: UBS

NEW YORK ( TheStreet) -- Regional banks with major exposure in Western markets "stand to benefit the most" from the continued increase in home prices, according to UBS analyst Greg Ketron.

On Tuesday, the S&P Case-Shiller national composite Home Price Index showed a third-quarter gain of 3.6% year over year, while prices were up 2.2% from the second quarter. Diving further into the recent data, Ketron said in a report later on Tuesday that "Western markets showed the most improvement with Las Vegas (+3.0%) and Phoenix (+2.9%) leading all metro-statistical areas (MSAs) over the past two months," while "Detroit was also up 2.9%." None of the MSAs showed home price declines.

S&P Dow Jones Indices said that home prices rose for a "sixth straight month" nationally. Looking just at the September results, the Case-Shiller Home Price Index showed declines in five of the 20 MSAs, all on the East Coast or in the Midwest.

Of course, with its legacy mortgage risk from its acquisitions of Countrywide Financial in 2008 and Merrill Lynch in 2009, Bank of America ( BAC) has quite a bit riding on the housing recovery. In its quarterly 10-Q filing with the Securities and Exchange Commission, Bank of America reported that total unresolved mortgage repurchase claims against the company had risen to $25.5 billion as of Sept. 30, from $12.6 billion at the end of last year.

Bank of America still hasn't resolved its long-running dispute with Fannie Mae over the government sponsored mortgage giant's mortgage putback claims, but the eventual resolution of that problem, along with a continued recovering in national home prices, should bode well over the long haul.

While some analysts think investors should steer clear of Bank of America until the Fiscal Cliff is resolved, it's also important to note that among the "big four" U.S. banks, the company is expected to see the greatest year-over-year earnings improvement in 2014. The consensus 2013 earnings estimate for Bank of America among analysts polled by Thomson Reuters is 97 cents, while the consensus 2014 EPS estimate is $1.27.

Turning back to regional housing trends, Ketron said that "generally speaking, Western banks and Midwest banks have led" his firm's month-to-month and year-over-year weighted rankings of home price increases within their geographic footprints.

Ketron reiterated his "positive view of regional banks," saying that the group trades at an average of 1.5 times tangible book value, and for an average of 10.4 times his firm's 2013 earnings estimates, and that "we continue to see value in regional banks as leverage to an improving economy and housing markets, market share gains, and lower regulatory burdens serve as key levers."

Here are the five regional bank stocks with "larger Western footprints" that Ketron says have the "most leverage" to improving home prices, ordered by ascending upside implied by UBS price targets.

5. Zions Bancorporation


Shares of Zions Bancorporation ( ZION) of Salt Lake City closed at $19.96 Tuesday, returning 23% year-to-date, following a 33% decline during 2011.

The shares trade for just under tangible book value, according to Thomson Reuters Bank Insight, and for 11.5 times the consensus 2013 earnings estimate of $1.74. The consensus 2014 EPS estimate is $1.94.

Zions ranked highest in UBS' "bank footprint ranking" for year-over-year home price increases in its market footprint, with a growth rate of 8.03%, "using a weighted average growth rate as a function of deposits per MSA."

Zions on Tuesday saw its shares slide 4% after CFO Doyle Arnold said at an investor conference that the company could report other-than-temporary-impairment, or OTTI, charges of "around $20 million pretax" during the fourth quarter, on "that rather large CDO portfolio that we have," according to a transcript provided by Thomson Reuters.

Zions reported OTTI charges of $2.7 million, or a penny a share, during the third quarter, and reported holding $2.088 billion in collateralized debt obligations, measured by amortized cost, as of Sept. 30, with a carrying value of $1.231 billion, with unrealized losses of $857 million.

The company has been recording smaller OTTI charges than what Arnold expects for the fourth quarter, as trust preferred securities held by the CDOs are prepaid, because the Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 excludes most trust preferred equity from banks' regulatory Tier 1 capital.

The updated fourth-quarter guidance also included $10 million in gains on "CDOs previously written down," and a 2% to 3% decline in core net interest income from the third quarter, with declining loan balances and rate pressure as loans renew at lower rates.

UBS analyst Stephen Scinicariello has a neutral rating on Zions Bancorporation, with a price target of $21.50, saying on Oct. 22 after the company reported its third-quarter results, that the completion of the redemption of the government-held preferred shares for bailout assistance received through the Troubled Assets Relief Program, or TARP, was "a critical step to the de-layering of ZION's high cost capital and funding structure."

Scinicariello is in front of the consensus, estimating that Zions will earn $1.83 a share in 2013, followed by 2014 EPS of $2.20.

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

4. U.S. Bancorp


Shares of U.S. Bancorp ( USB) of Minneapolis closed at $32.10 Tuesday, returning 21% year-to-date, following a 2% return last year.

The shares trade for 2.6 times tangible book value, and for 10.4 times the consensus 2013 EPS estimate of $3.08. The consensus 2014 EPS estimate is $3.32. Based on a quarterly payout of 19.5 cents, the shares have a dividend yield of 2.43%.

U.S. Bancorp placed fifth in the UBS bank footprint ranking, with weighted home price growth rate of 5.24% in its market footprint.

U.S. Bancorp has been one of the strongest and most consistent earners among large U.S. banks, with operating returns on average assets (ROA) increasing steadily from 1.58% to 1.71% over the past five quarters, according to Thomson Reuters Bank Insight. The strong performance is reflected in the relatively high price-to-tangible-book ratio.

Ketron rates U.S. Bancorp a "Buy," with a $38 price target, saying on Oct. 17 after the company announced its third-quarter results that "the bank continues to post above average returns, was able to maintain its net interest margin, or NIM while there has been sharp contractions at peers, and has had above average loan growth."

The analyst added that "operating trends were positive across the board, and only slightly missed our estimate of $0.75 due to a higher than expected loan loss reserve provision."

USB set aside $488 million for credit losses during the third quarter, increasing from $470 million the previous quarter, but declining from $519 million a year earlier. The company said in its earnings release that its third-quarter loan losses "included $54 million of incremental charge-offs due to a regulatory clarification." Despite the increase in charge-offs, the company still added less to reserves than it charged-off, "releasing" $91 million in loan loss reserves, which boosted earnings.

Ketron estimates that U.S. Bancorp will earn $3.10 a share in 2013, followed by EPS of $3.40 in 2014.

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

3. City National Corp.


Share of City National Corp. ( CYN) of Los Angeles closed at $49.11 Tuesday, returning 13% year-to-date, following a 27% decline during 2011.

The shares trade for 1.6 times tangible book value, and for 12.5 times the consensus 2013 EPS estimate of $3.94. The consensus 2014 EPS estimate is $4.09. Based on a quarterly dividend of 25 cents, the shares have a yield of 2.04%.

City National on Nov. 15 that it would move up the payment of its fourth-quarter dividend to Dec. 18, while also paying a special dividend of 25 cents a share on the same date, avoiding the possible increase of the 15% federal income tax rate cap on qualified dividends that will occur in 2013, unless President Obama and Congress extend the lower rate as part of a deal to resolve the Fiscal Cliff. Otherwise, the dividends will be treated as ordinary income next year.

The company ranked seventh in the UBS ranking of home price changes, weighted by deposit share in City National's market footprint, with year-over-year growth rate of 4.20%, although the company was in second place with an annualized price increase rate of 0.97% in September.

City National has shown strong earnings improvement over the past year. The company's third-quarter net revenue, excluding provisions for loan losses, increased to 52% year-over-year, to $108.5 million. Noninterest income -- excluding investment gains -- was up 61% year-over-year to $106.4 million, as the company booked $1.7 million in revenue from FDIC loss-sharing agreements, compared to $14.2 million in expenses from the agreements a year earlier.

Trust and investment fees rose to $43.5 million in the third quarter from $35.4 million in the third quarter of 2011, while brokerage and mutual fund fees increased to $9.1 million from $5.1 million, reflecting the acquisition Rochdale Investment Management in July.

Scinicariello rates City National a "Buy," with a $60 price target saying on Nov. 15 after the dividend announcement that "Including the special dividend and the accelerated 4Q12 dividend payment, the dividend payout ratio totals ~37% for 2012 which is a testament to the company's solid capital position. On an ongoing basis, we estimate that the dividend payout ratio will run at a ~25% level with plenty of support for further increases."

The analyst added that with a strong Sept. 30 Tier 1 common equity ratio of 9.1%, "we expect continued opportunistic capital deployment with a focus on organic growth, dividends, and accretive acquisitions across business lines."

Scinicariello estimates that City National will earn 75 cents a share in 2013, followed by EPS of $1.08 in 2014.

Interested in more on City National Corp.? See TheStreet Ratings' report card for this stock.

2. Umpqua Holdings


Shares of Umpqua Holdings ( UMPQ) of Portland, Ore., closed at $11.76 Tuesday, down 3% year-to-date, after returning 4% in 2011.

The shares trade for 1.3 times tangible book value, and for 13.4 times the consensus 2013 EPS estimate of 88 cents. The consensus 2014 EPS estimate is 90 cents. Based on a quarterly payout of nine cents, the shares have a dividend yield of 3.06%.

The company on Nov. 15 completed its acquisition of Circle Bancorp of Novato, Calif., for $20.4 million in cash. Circle Bancorp's main subsidiary was Circle Bank, which had $326.5 million in total assets as of Sept. 30, with six branches in the San Francisco Bay area.

Umpqua was in third place in the UBS weighted ranking of home price changes, with prices rising 5.73% year-over-year, but was in first place for September, with home prices rising a weighted 1.09% within its market footprint, from the previous month.

Scinicariello rates Umpqua a "Buy," with a price target of $14.50, saying on Oct. 18 that the company's third-quarter "loan growth remained solid and asset quality continued to improve. A 56% sequential increase in mortgage banking led to a 16% increase in fee income while expenses held steady."

While saying that Umpqua was trading at "a modest premium to peers," the analyst said that "we believe outsized growth potential supports this valuation."

Scinicariello estimates that Umpqua will earn 90 cents a share in 2013, increasing to 97 cents in 2014.

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

1. Comerica


Shares of Comerica ( CMA) of Dallas closed at $29.59 Tuesday, returning 16% year-to-date, following last year's 38% decline.

The shares trade for 0.9 times tangible book value, and for 11.3 times the consensus 2013 EPS estimate of $2.63. The consensus 2014 EPS estimate is $2.76. Based on a quarterly dividend of 15 cents, the shares have a yield of 2.03%.

Comerica was in second place in the UBS weighted ranking of home price changes, with prices increasing 7.17% year-over-year, through September.

The company's third-quarter net interest margin narrowed by 14 basis points from the previous quarter to 2.96%. Scinicariello said on Oct. 17 that the margin pressure was "overstated," as "significant portion should prove nonrecurring."

The analyst added that "several factors should mitigate the extent of future NIM impacts including normalized nonaccrual interest, lack of lease valuation adjustments, slowing loan mix shift, and the timing of QE3 and effect on MBS yields."

Scinicariello rates Comerica a "Buy," with a $37 price target, and estimates the company will earn $2.60 a share in 2013, increasing to EPS of $3.06 in 2014.

"A solid capital position remains a source of strength with Tier 1 Common=10.32% and TCE=10.25%," Scinicariello said, and "positive capital generation should keep the company comfortably in excess of required capital levels which positions CMA well for future deployment" of capital, and for the Federal Reserve's 2013 stress tests. "To the extent that capital is readily deployed into loan growth, this could lead to more rapid revaluation of the company, in our view."

Interested in more on Comerica? 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 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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