Citigroup Is Your Best Bank Stock Play Through 2015: Deutsche Bank

NEW YORK ( TheStreet) -- To the business media, "long-term investment" often seems to mean an investment that is held for more than five minutes.

Most sell-side analysts provide long-term price targets for their stock recommendations with a 12-month outlook, which makes sense because this is what their customers demand. But one year is actually a short period to invest in a profitable, growing company that you believe in, and strong earnings and earnings growth will win out over the long hall, despite the short-term volatility of the stock market, which is driven by so many headline events. The recent Fiscal Cliff farce in Washington is a prime example.

Deutsche Bank analysts Matt O'Connor and Dave Rochester on Friday named their four top bank stock picks with a three-year outlook through 2015, saying that the most important of the many themes for the industry is loan growth: "We think a ramp up of loan growth in 2H13 or in 2014 is likely (to mid single digits or more). This reflects a potential end of private sector de-leveraging, strong capital/funding at banks and the impact of likely GSE/mortgage finance reform." The GSEs are the government-sponsored mortgage entities, the largest of which are Fannie Mae ( FNMA) and Freddie Mac ( FMCC), which were taken under government conservatorship in 2008. Considering the inability of Congress to make decisions, GSE reform by 2015 may be wishful thinking, but the U.S. economy is growing and economic reports continue to provide evidence of a sustained housing recovery.

O'Connor and Rochester said that "loan growth could reach double digits in 2015." The analysts' "base case" scenario is for the U.S. economy to grow at an annual pace of 2.5% through 2015.

Here are Deutsche Bank's four bank stock picks for long-term growth through 2015:
  • Citigroup (C). O'Connor on Friday reiterated his "Buy" rating and raised his 12-month price target for Citi to $46 from $40, saying that "in our base-case scenario, our preference is to own bank stocks that still have leverage to the recovery (vs. current stock prices). We believe C is best positioned for this." The analyst estimates that Citigroup will earn $4.60 a share in 2013, with EPS increasing to $5.14 in 2014 and $6.01 in 2015, with key elements being the U.S. housing recovery and the company's cost-cutting efforts. O'Connor also sees less interest rate risk for Citigroup than for other large U.S. banks, because of the company's international exposure. Citigroup also trades at the lowest multiples to book value and to forward earnings estimates, among the banks covered by Deutsche Bank. Citi's shares closed at $41.39 Thursday, trading for 0.8 times the reported Sept. 30 tangible book value of $52.70.
  • First Republic Bank (FRC) of San Francisco. Rochester upgraded First Republic to a "Buy" rating from a "Hold," and raised his price target for the former subsidiary of Bank of America by a dollar to $38, saying "we expect EPS growth double the rate of the industry for the next two years to support premium trading multiples and solid share upside." The analyst cited "above peer" growth prospects for the bank's business banking and wealth management services, as well as "a materially reduced private equity ownership overhang (from 39% in Mar. 2012 to 14% in Dec. 2012." Rochester added that First Republic could be tempted by the "potential for an increasing take-out premium over time," as its total assets approach $50 billion. First Republic's shares closed at $33.69 Thursday. Deutsche Bank estimates the bank will earn $2.96 a share in 2013, with EPS increasing to $2.97 in 2014 and $3.05 in 2015.
  • U.S. Bancorp (USB). O'Connor upgraded USB to a "Buy" rating from a "Hold," raising his price target to $38 from $29, saying he expected "growth of 28% from 2012-2015, nearly double the industry average of 15%. Two key drivers of this growth are likely to be continued market share gains in mortgage and a pickup in consumer and commercial spending (payments represents 15-20% of USB's revenue)." The analyst also said that U.S. Bancorp could also see a major boost from GSE reform, since the company's mortgage loan "origination share has doubled since the crisis, but stands at just 5% vs. 30% at WFC, 10% at JPM and 4% at BAC)." Deutsche Bank estimates that the company will earn $3.06 a share in 2013, with EPS rising to $3.31 in 2014 and $3.65 in 2015. U.S. Bancorp was included among TheStreet's 5 Bank Stocks That Can't Stop Posting Profits, as the company has managed to keep its return on average tangible common equity above 10% for the past 27 quarters, even though the worst period of the credit crisis.
  • Signature Bank (SBNY) of New York. Rochester upgraded Signature Bank to a "Buy" rating from a "Hold," and raised his price target for the shares by two dollars to $81, as he believes the rapidly growing commercial lender is primed for "sustainable, above peer EPS/revenue growth more than double the mid cap banks given a low market penetration and unique business model that can drive material market share gains," as well as strong capital levels, strong credit quality and "asset sensitivity with a moderate rise in rates." Signature Bank's shares closed at $72.40 Friday. Deutsche Bank estimates the bank will earn $4.35 a share this year, with EPS increasing to $4.85 in 2014 and $5.00 in 2015.

Rounding Out the "Big Four" U.S. Banks

O'Connor on Friday reiterated his "Hold" rating for Bank of America ( BAC), but raised his price target for the shares to $11 from $9, saying that the new target "assumes the stock trades at a modest discount to our target group multiple," of nine times 2014 EPS estimates "for market sensitive peers, given a large earnings ramp assumed and lack of certainty over new BAC cost saves." The analyst estimates that Bank of America will earn 97 cents a share this year, with EPS increasing to $1.42 in 2014 and $160 in 2015. Bank of Americas shares closed at $11.96 Thursday.

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