A Lumpy Fourth Quarter Banks Clearing Mortgage Decks
Bank of America has led the way for banks reporting extraordinary fourth-quarter items, announcing on Monday a settlement of its long-running feud with government-sponsored mortgage giant Fannie Mae ( FNMA) that will include a cash payment of $3.55 billion and a $6.75 billion payment to repurchase 30,000 loans sold to Fannie before 2008. With some of the costs associated with the settlement having already been reserved for, Bank of America said that the entire Fannie Mae settlement would lower its fourth-quarter earnings by $2.7 billion. In addition to the Fannie settlement, Bank of America also announced that its fourth-quarter results would be "negatively impacted by approximately $2.5 billion (pretax) for the independent foreclosure reviews, litigation (primarily mortgage-related), and other mortgage-related matters," leaving the company to report "modestly positive" earnings. The company said that its estimated range for additional mortgage putback losses had declined to a maximum of $4 billion as of Dec. 30, from $6 billion at the end of the third quarter. Following on the theme of clearing out mortgage risk, Bank of America also announced Monday that Fannie Mae, Freddie Mac and Ginnie Mae had agreed to allow the company to sell the servicing rights on 2 million residential mortgage loans, with unpaid balances totaling $306 billion. About 232,000 of the loans with servicing to be transferred were past due 60 days or more. Nationstar Mortgage Holdings ( NSM) announced it would purchase from Bank of America the servicing rights for 1.3 million mortgage loans with unpaid balances totaling $215 billion, for $1.3 billion, while Walter Investment Management ( WAC) said it would buy servicing rights on 650,000 loans with unpaid balances totaling $93 billion from Bank of America for $519 million. Bank of America is the largest participant in the $8.5 billion foreclosure settlement between the nation's largest mortgage loan servicers, the Federal Reserve and the Office of the Comptroller of the Currency, which was also announced Monday. Wells Fargo ( WFC) announced that its ""portion of the cash settlement will be $766 million, which is based on the proportionate share of Wells Fargo-serviced loans in the overall IFR population." The company also said it would "record a pre-tax charge of approximately $644 million in the fourth quarter of 2012 to fully reserve for its cash payment portion of the settlement and additional remediation-related costs." The effect of the charge will be a reduction in fourth-quarter earnings of roughly 12 cents a share, according to Stifel Nicolaus analyst Christopher Mutascio. Credit Suisse analyst Moshe Orenbuch on Wednesday downgraded Bank of America to a neutral rating from an "Outperform" rating, saying the stock's "current valuation appears to be ahead of the company's near to intermediate-term performance and appears to be discounting significantly faster improvements in efficiency than we would be expecting." Despite the downgrade, the analyst raised his price target for the shares by a dollar to $12.00. Bank of America's shares were down 5% on Wednesday to close at $11.43. The shares rose 110% during 2012, after dropping 58% during 2011. Citigroup announced that it would "record a pre-tax charge of approximately $305 million in the fourth quarter of 2012 for its cash payment portion of the settlement," while U.S Bancorp ( USB) said that its "share of the settlement will include a cash payment of $80 million (pretax), which is expected to reduce fourth-quarter 2012 earnings per share by approximately 3 cents. In addition, the settlement includes a commitment to provide approximately $128 million of other mortgage assistance, such as loan modifications, which is covered by existing loan loss reserves." Mosby on Wednesday raised his price target for Citigroup's shares to $55, implying 30% upside from Tuesday's closing price of $42.46, saying "While we do not expect C to report its full earnings power in 4Q12, we believe that its valuation is based more on reduction of loss potential in Citi Holdings and approval to deploy excess capital in March. Thus, we have increased C's price target to ~95% of year-end 2013's tangible book value." Citi's shares now trade at 0.8 times its reported Sept. 30 tangible book value of $52.70.
Could the Margin Squeeze Be Ending?
A major theme for most large U.S. banks over the past few years has been the pressure on net interest margins (NIM), as the Federal Reserve has kept its short-term federal funds rate in a target range of zero to 0.25% since the end of 2008, while also doing everything it can to push long-term rates down and hold them at their current levels. The Federal Reserve Open Market Committee on Dec. 12 said that it would continue its purchases of mortgage-backed securities at a pace of $40 billion a month, while also "initially" continuing to buy $45 billion in long-term U.S. Treasury securities each month, in a continued effort to hold long-term rates down. The Fed also stopped its concurrent monthly sales of short-term securities, meaning that the central bank's balance sheet, at least initially, is growing faster in 2013 than it did during 2012. The Fed's latest actions may not have the desired effect. JPMorgan Chase analyst Vivek Juneja said in a report on Tuesday that "10 year Treasury yields are up sharply by 32bp from early December lows to 1.90%. If this is sustained and followed by equal rise in 30yr MBS yields (up 21bp to date), it could modestly reduce net interest margin (NIM) pressure with lower reinvestment risk." Of course, higher interest rates would also have the effect of slowing down the mortgage refinance wave and lowering banks' income from mortgage originations and sales. Juneja said that "overall, we expect a weak 4Q for large cap banks as pressure on net interest revenues and weak trading should be partly offset by continued strength in mortgage origination revenues and investment banking fees plus improved credit quality with continued sharp decline in loan loss reserves." The analyst said that there was "a sharp pick-up" in commercial and industrial (C&I) lending by banks late during the fourth quarter, "which would not help 4Q12 much but bodes well for 2013." So for the fourth quarter investors can expect many of the banks to trumpet their improved loan growth, while bottom-line results will continue to be padded by the release of loan loss reserves, and a continued decline in net interest margins is offset by strong mortgage results.
Leaving out the "big four" U.S. bank and the trust banks, here are earnings previews for the ten largest KBW Bank Index components by asset size. The names are ranked by descending ratio of price to 2013 consensus earnings estimates:
10. M&T Bank
Shares of M&T Bank ( MTB) of Buffalo, N.Y., closed at $102.46 Monday, trading for 2.4 tangible book value, according to Thomson Reuters Bank Insight, and for 12.5 times the consensus 2013 earnings estimate of $8.21 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $8.89. The shares returned 33% during 2012, following a 9% decline during 2011. Based on a quarterly payout of 70 cents, the shares have a divided yield of 2.73%. M&T in August announced a deal to acquire Hudson City Bancorp ( HCBK) of Paramus, N.J., for $3.7 billion in cash and stock. Hudson City had $41.9 billion in total assets as of Sept. 30, with 135 branches in New York, New Jersey, and Fairfield County in Connecticut. The merger is expected to be completed during the second quarter. Analysts expect M&T to report fourth-quarter earnings of $2.17 a share, matching the bank's third-quarter bottom line, but increasing from $1.04 a share in the fourth quarter of 2011, when the bank reported several extraordinary items, including a $79 impairment charge related to its 20% stake in Bayview Lending Group, and another impairment charge of $25 million in mortgage-backed securities. KBW analyst Brian Klock on Dec. 13 upgraded M&T to an "Outperform" rating from "Market Perform," while raising his price target for the shares by two dollars to $111. Klock expects M&T to post fourth-quarter earnings of $2.15 a share, and estimates EPS of $8.45 in 2013, rising to $9.10 in 2014. The analyst said that "MTB is well positioned to offset NIM headwinds with expense controls, and we believe the HCBK merger will be very accretive and a catalyst for consensus estimates to move higher." MTB data by YCharts
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Shares of Comerica ( CMA) of Dallas closed at $32.34 Monday, trading just below tangible book value, and for 12.3 times the consensus 2013 EPS estimate of $2.64. The consensus 2014 EPS estimate is $2.74. The shares returned 20% during 2012, following a 38% decline in 2011. Based on a quarterly payout of 15 cents, the shares have a dividend yield of 1.86%. Comerica is scheduled to report its fourth-quarter results on Jan. 16, with the consensus among analysts being a profit of 65 cents, increasing from 61 cents in the third quarter, and 48 cents in the fourth quarter of 2011. Brian Klock on Dec. 12 lowered his rating for Comerica to "Underperform," and lowered his price target for the shares by a dollar to $28, saying "CMA is a well-run bank, with excess capital, but in our opinion the difficult interest rate and economic environment is more challenging to the company's extremely asset sensitive business model and earnings power. During the third quarter, Comerica's net interest income declined to $427 million, from $435 million in the second quarter, although it increased from $423 million in the third quarter of 2011. The company's net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed to 2.96%, from 3.10% the previous quarter, and 3.18% a year earlier. Klock also said that "consensus estimates are too high for 2013 & 2014 and with a lack of earnings growth expected over the next two years, we believe the shares will underperform the large regional peer bank in 2013." He estimates that Comerica will report fourth-quarter earnings of 63 cents a share and that the bank will earn $2.60 a share in 2013 and in 2014. Oppenheimer Securities analyst Terry McEvoy on Wednesday downgraded Comerica to a "Perform" rating from "Market Perform," saying that recent strength for the stock "reflects the rise in the 10-year Treasury yield given the company's asset-sensitive balance sheet. We would remind investors that 85% of Comerica's loan portfolio is variable rate and about 75% is indexed to one-month LIBOR. One-month LIBOR has been hovering around 21bps over the past few weeks while the yield on the 10-year security has spiked above 1.90%." "Therefore, we do not see a meaningful impact to Comerica's net interest margin or earnings in 1H13 if one-month LIBOR remains unchanged," he said. McEvoy added that "Comerica's earnings have to potential to nearly double once we enter a more normal interest rate environment. Unfortunately, that still appears to be some years into the future." Comerica's shares pulled back 1% on Wednesday to close at $31.60. CMA data by YCharts
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Shares of SunTrust ( STI) of Atlanta closed at $28.97 Monday, trading for 1.1 times tangible book value, and for 10.7 times the consensus 2013 EPS estimate of $2.71. The consensus 2014 EPS estimate is $3.00. The shares returned 62% during 2012, following a 40% decline during 2011. SunTrust will announce its fourth-quarter results on Jan. 18, with analysts expecting a profit of 62 cents a share, declining from $1.98 in the third quarter, but increasing from 13 cents in the fourth quarter of 2011. Both prior periods reflected one-time items. During the third quarter, the company strengthened its balance sheet by selling its holdings of Coca-Cola ( KO) shares, for a pre-tax gain of $1.9 billion. SunTrust also reported a $371 million provision for mortgage repurchase claims during the third quarter, saying that the move had boosted its putback reserves "to a level that is expected to cover the estimated losses on loans sold to Government Sponsored Enterprises (GSEs) prior to 2009." The fourth-quarter 2011 results reflected an elevated mortgage putback provision, as well as a negative mortgage servicing rights valuation adjustment, in light of the expected effect of the expanded Home Mortgage Refinance Program, or HARP 2.0. JPMorgan analyst Vivek Juneja rates SunTrust "Overweight," with a price target of $32.50, estimating that the company will report fourth-quarter earnings of 65 cents a share, with a 2013 EPS estimate of $2.78, increasing to $3.10 in 2014. Juneja said that among large-cap bans covered by his firm, "SunTrust should be one of the biggest beneficiaries from housing market recovery," as the company "has had an unusually large drag from mortgage related issues on several fronts versus peers." The analyst added that the stock's "valuation is also attractive as STI trades below regional peers based on tangible book multiple." STI data by YCharts
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7. U.S. Bancorp
Shares of U.S. Bancorp of Indianapolis closed at $32.92 Monday, trading for 2.6 times tangible book value, and for 10.7 times the consensus 2013 EPS estimate of $3.08. The consensus 2014 EPS estimate is $3.32. The shares returned 21% during 2012, following a 2% return in 2011. Based on a quarterly payout of 19.5 cents, the shares have a 2.37% dividend yield. USB will announce its fourth-quarter results on Jan. 16, with the consensus estimate being a profit of 75 cents a share, improving from 74 cents the previous quarter, and 69 cents a year earlier. The market's high valuation of U.S. Bancorp's shares to tangible book value reflects the company's long-term record of steady and strong earnings. According to data supplied by Thomson Reuters Bank Insight, the company is among only eight publicly traded U.S. banks -- with average daily trading volume of over 50,000 shares -- that have shown profits for every quarter since the beginning of 2006, with returns on average tangible common equity exceeding 10% from the first quarter of 2010 through the third quarter of 2012. The company's return on tangible common equity has ranged from 20.88% to 23.02% over the past five quarters. Oppenheimer analyst Chris Kotowski rates U.S. Bancorp "Perform" and estimates the company will report fourth-quarter earnings of 75 cents a share, matching the consensus. His 2013 EPS estimate is $3.12. Kotowski said on Dec. 20 that "USB has a remarkably stable business model, and most of the line items are highly predictable; we are expecting 5% loan growth by the end of 2013, somewhat lower than we had been previously been modeling, but see very little chance that this can't be made up on the fee side." USB data by YCharts
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Shares of KeyCorp ( KEY) of Cleveland closed at $8.97 Monday, trading just below tangible book value and for 10.4 times the consensus 2013 EPS estimate of 86 cents. The consensus 2014 EPS estimate is 93 cents. The shares returned 12% during 2012, following a 12% decline in 2011. Based on a quarterly payout of a nickel, the shares have a dividend yield of 2.23%. KeyCorp will announce its fourth-quarter results on Jan. 23, with analysts expecting a profit of 21 cents a share, down from 23 cents in the third quarter, but increasing from 20 cents in the fourth quarter of 2011. KBW analyst Brian Klock rates KeyCorp "Underperform," with an $8.00 price target, and estimates the company will report fourth-quarter earnings of 20 cents a share, with a 2013 EPS estimate of 80 cents and a 2014 EPS estimate of 90 cents. The analyst said on Dec. 12 that although "KEY has some levers to protect the net interest margin (NIM) in 2013, in the form of high-cost CDs and growth in the credit card book, we believe consensus provision and expense levels are too low." The provision he refers to is the quarterly provision for loan losses, which lowers earnings. Regarding the stock's valuation, Klock said "we believe the NIM protection and capital deployment catalysts are already priced in the stock and we believe that incremental operating leverage will be a challenge to achieve," and that "we believe the shares will underperform the large regional peer group as consensus estimates come down to our estimates, resulting in downward pressure on the shares." Guggenheim analyst Terry McEvoy on Wednesday upgraded KeyCorp to "Outperform" to "Perform," with a price target of $11.00, saying that "Under the guidance of a relatively new CEO, KeyCorp has moved away from an old strategy of trying to be all things to all people to one focused on specific geographic markets and industry sectors. This new strategy should create a less volatile, lower-risk revenue stream, and we are already starting to see positive trends within Key's corporate banking business." McEvoy said that he expects tan expanded fourth-quarter net interest margin and plans to return capital to investors after the next round of Federal Reserve stress tests are completed in March, to be "catalysts for the stock." The analyst expects KeyCorp to report fourth-quarter earnings of 23 cents a share, and that the company will earn 90 cents a share in 2013. KeyCorp's shares were down 1% on Wednesday, closing at $8.90. KEY data by YCharts
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Shares of BB&T ( BBT) of Winston-Salem, N.C., closed at $30.04 Monday, trading for 1.8 times tangible book value and for 10.3 times the consensus 2013 EPS estimate of $2.92. The consensus 2014 EPS estimate is $3.14. The shares returned 19% last year, following a 2% decline during 2011. Based on a quarterly payout of 20 cents, the shares have a dividend yield of $2.66. BB&T will announce its third-quarter results on Jan. 17. The consensus among analysts is for the company to report a profit of 70 cents a share, increasing from 66 cents in the third quarter, and 55 cents during the fourth quarter of 2011. A narrowing net interest margin is a major concern for the bank and for investors. The margin held up well at 3.94% during the third quarter, narrowing just one basis point from the previous quarter, but the company provided guidance saying that the margin would narrow "to the mid-3.70s% range" in the fourth quarter. Deutsche Bank analyst Matt O'Connor rates BB&T a "Hold," with a $34 price target, and said on Dec. 11 after meeting with the company's CFO Daryl Bible that the fourth quarter "could be better than expected," from the "NIM coming in slightly better," and increasing gains on mortgage loan sales. O'Connor estimates that BB&T will report fourth-quarter earnings of 72 cents a share, and estimates the company will earn $2.90 a share in 2013. BBT data by YCharts
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4. Fifth Third Bancorp
Shares of Fifth Third Bancorp ( FITB) of Cincinnati closed at $15.58 Monday, trading for 1.3 times tangible book value, and for 9.8 times the consensus 2013 EPS estimate of $1.59. The consensus 2014 EPS estimate is $1.66. The shares returned 23% during 2012, following an 11% decline during 2011. Based on a quarterly payout of 10 cents, the shares have a dividend yield of 2.57%. Fifth Third in December sold 13.7 million shares of Vantiv ( VNTV), its former payment processing subsidiary, which was spun-off last March. The sale resulted in a gain of about $155 million, or approximately $100 million after taxes. The company said on ____ that it "continues to hold approximately 70.2 million Class B units of Vantiv Holding, LLC which may be exchanged for Class A common stock of Vantiv on a one-for-one basis (or, at Vantiv's option, a cash equivalent), as well as a warrant that is exercisable and exchangeable into Vantiv Class A Common Stock." The company also said that it "has a remaining economic interest of approximately 33.0 percent of Vantiv's future earnings." Fifth Third will report its fourth-quarter results on Jan. 17, with analysts expecting a profit of 42 cents a share, increasing from 38 cents the previous quarter, and 33 cents a year earlier. KBW analyst Jefferson Harralson rates Fifth Third "Outperform," with an $18 price target, estimating the company will report fourth-quarter earnings of 43 cents. The analyst estimates that Fifth Third will earn $1.65 a share in 2013, with EPS rising to $1.75 in 2014. Harralson said in a report on Dec. 14 that since "that the market does not appear to be giving credit to FITB for the VNTV stake, our opinion is that FITB will ultimately continue to monetize its VNTV stake, using the proceeds to repatriate capital to shareholders through either buybacks or dividends." FITB data by YCharts
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3. Regions Financial
Shares of Regions Financial ( RF) of Birmingham, Ala., closed at $7.46 Monday, trading for 1.1 times tangible book value and for 9.6 times the consensus 2013 EPS estimate of 78 cents. The consensus 2014 EPS estimate is 81 cents. The shares returned 67% during 2012, after declining 38% in 2011. Regions is scheduled to report its fourth-quarter results on Jan. 22, with analysts expecting a profit of 21 cents a share, matching the third-quarter result but improving from a 48-cent loss during the fourth quarter of 2011, when the company recorded $731 million goodwill impairment charge, as it prepared to sell its Morgan Keegan brokerage subsidiary to Raymond James Financial ( RJF) for roughly $1.2 billion. Regions completed the sale during the first quarter, when it also raised $900 million in common equity through a public offering of shares. The company then fully redeemed the $3.5 billion in preferred shares held by the U.S. Treasury for bailout assistance received in November 2008 through the Troubled Assets Relief Program, or TARP. JPMorgan analyst Vivek Juneja has a neutral rating on Regions, with a price target of $8.50, estimating the bank will post fourth-quarter earnings of 20 cents, with a 2013 EPS estimate of 81 cents, increasing to 85 cents in 2014. The analyst said on Dec. 14 that the company's "earnings should be driven primarily by large loan loss reserve releases, along with some further improvement in net interest margin and reduction in credit related expenses as
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2. PNC Financial Services Group
Shares of PNC Financial Services Group ( PNC) of Pittsburgh closed at $61.03 Monday, trading for 1.2 times tangible book value and 9.3 times the consensus 2013 EPS estimate of $6.58. The consensus 2014 EPS estimate is $6.90. The shares returned 4% in 2012 after declining 3% in 2011. Based on a quarterly payout of 40 cents, the shares have a dividend yield of 2.62%. PNC will announce its fourth-quarter results on Jan. 17, with the consensus estimate being a profit of $1.57 a share, declining from $1.64 in the third quarter, but increasing from 85 cents in the fourth quarter of 2011, when the company booked "$240 million of residential mortgage foreclosure-related expenses primarily as a result of ongoing governmental matters" and took a $198 million charge related to the redemption of trust preferred securities. PNC was included in the $8.5 billion regulatory foreclosure settlement announced on Monday, but the company didn't make a separate announcement on how much it would be paying. The company on Wednesday announced a series of one-time items that will "will reduce PNC's fourth quarter 2012 net income by approximately $.47 per diluted common share," including $91 million in expenses related to mortgage foreclosures, including $70 million for the industry settlement. Other items include " a pretax provision of $254 million for residential mortgage repurchase obligations related to expected elevated levels of repurchase demands primarily as a result of further changes in behavior and demand patterns of government-sponsored enterprises, FHLMC and FNMA," along with a $45 million goodwill impairment charge for the company's mortgage unit, and a gain of $130 million on the sale of Visa ( V) shares. PNC also said that it "recorded $35 million of pretax integration costs and $70 million of pretax noncash charges for the remarketing and redemption of high cost hybrid capital securities." Stifel Nicolaus analyst Christopher Mutascio rates PNC a "Hold," and said after the announcement that the company is "backing out" the $254 million mortgage putback provision, "when it states that its EPS will exceed $1.57." "We don't know how investors will view this, but we do not back it out of core operations. We thought the company's large reserve build in 2Q12 was the 'kitchen sink' action. Apparently, we were wrong and these charges are more repetitive than we thought," he said. Mutascio also said that although PNC backed the $35 million in integration costs out of its core earnings guidance, "we don't back these out of our core EPS calculation either as mergers and acquisitions are a business line item for the bank. As such, we believe there is a high probability that integration costs will be an ongoing contribution to the company's expense base. This is no different than how we treat integration expenses at our other banks." Mutascio's core fourth-quarter earnings estimate for PNC was updated to $1.18, factoring in another thee cents of expenses for backed out by PNC, for the "residual $21 million" included in the company's mortgage foreclosure expenses. PNC's shares were down 1% in early trading Wednesday, to $59.80. PNC's shares were down slightly, closing Wednesday at $60.17. PNC data by YCharts
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1. Capital One Financial
Shares of Capital One ( COF) Financial of McLean, Va., closed at $62.88 Monday, trading for 1.6 times tangible book value, and for nine times the consensus 2013 EPS estimate of $7.02. The consensus 2014 EPS estimate is $7.38. The shares returned 38% during 2012, following a flat return in 2011. Capital One will report its fourth-quarter results after the market closes on Jan. 17, with the consensus among analysts being a profit of $1.62 a share, compared to EPS of $2.01 the previous quarter and 88 cents a year earlier. The third quarter was Capital One's first "clean quarter" of 2012, with the company reporting a strong return on average tangible common equity of 21.48%. The first and second quarters of 2012 were affected by numerous one-time items springing form Capital One's two transformative mergers. The company in February acquired ING Direct (USA), followed by a $1.25 billion common equity raise in March. Then in May, Capital One purchased HSBC's ( HBC) U.S. credit card portfolio for $2.5 billion. The ING deal included about $80 billion in deposits gathered over the Internet, along with $41 billion in loans, providing more than sufficient liquidity for the $28.2 billion in credit card loans acquired from HSBC. FBR analyst Paul Miller on Dec. 19 included Capital One among his list of "stocks to own for 2013," with a price target of $72, saying the company is "one of our favorite names due to its compelling valuation ($72 target = 10x our FY13 EPS estimate and 1.1x book value), expected resumption of the dividend, and increased earnings power." Miller estimates that Capital One will report fourth-quarter EPS of $1.71, and estimates the company will earn $7.15 a share in 2013, with EPS rising to $7.25 in 2014. COF data by YCharts
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