Covering the Cost of Equity
Large-cap banks' 2012 stock performance showed that investors were growing much more comfortable with banks' ability to manage credit losses. Looking ahead, investors will be looking for banks to improve their returns on tangible common equity (ROTCE), to cover and then exceed the cost of equity. Guggenheim estimates that for the 18 large-cap banks that it covers, the median ROTCE for 2013 will be 12.5%, while the cost of equity will be 11.3%. Among the group, the median "excess return" over the cost of equity is projected to be 1.8%, and only half the group is expected by Guggenheim to generate excess returns. The large-cap bank expected by Guggenheim to generate the highest excess return this year is U.S. Bancorp ( USB) of Minneapolis. The company has been among the strongest industry performers through and after the credit crisis. During 2012, USB's return on average common equity was a very strong 22.28%, according to Thomson Reuters Bank Insight. For 2013, Mosby estimates that USB's ROTCE will be 23.3%, against a cost of equity of 8.1%, for a fat excess return of 15.2%. Mosby on Tuesday lowered his price target for USB to $41.00 from $42.00, but maintained his "buy" rating on the shares. JPMorgan Chase analyst Vivek Juneja has a differing opinion on U.S. Bancorp, and on Jan. 30 lowered his rating on the shares to "neutral" from "overweight," saying that "USB's revenue growth is slowing and we expect the gap in revenue growth for USB to narrow versus peers." Juneja lowered his price target for the shares to $37.50 from $39.50 and lowered his 2014 earnings estimate to $3.30 a share from $3.37.