Two Upgrades to 'Buy'Mutascio on Monday upgraded Wells Fargo and U.S. Bancorp to "buy" from "hold" ratings. The analyst's price target for Wells Fargo is $42, and he said the stock's discount to lesser-performing peers "is based on fears that the company is over-earning in the current mortgage banking environment." Mutascio disagrees with that notion, and said "the company has several material offsets to lower origination activity and gain on sale margins."
Two Downgrades to 'Sell'
Mutascio downgraded these regional banks to "sell" from "hold" ratings, with no price targets:
- KeyCorp of Cleveland. Mutascio estimates the company's ROA for 2014 will be 0.94% on EPS of $0.91. "Our analysis indicates the company has no material EPS upside in an environment where both the net interest margin and the loan loss provision expense normalize," he wrote. Net interest margins would "normalize" in a higher-rate environment. The loan loss provision is the quarterly addition to loan loss reserves. With credit quality improving, many banks, including Comerica, have seen a benefit to earnings as loan loss reserves are "released." Mutascio also said "the shares trade at the second-highest P/E multiple within our large-cap bank universe."
- Comerica of Dallas. "The shares are trading at a 25% premium to the rest of our large-cap bank coverage universe despite having one of the lowest projected ROAs," Mutascio wrote. The analyst added that "with approximately 72% of the company's earning assets tied to the short-end of the yield curve (not the long end), we believe the market is way ahead of itself in assuming just how much the company benefits from the recent rise in long-term interest rates." Stifel Nicolaus estimates that Comerica's 2014 ROA will be 0.75%, with EPS of $2/85.
One Downgrade to 'Hold'
Mutascio downgraded Fifth Third Bancorp ( FITB) of Cincinnati to "hold" from "buy," calling the move "purely a valuation call as the shares are now within 2% of our $17 target price." The analyst added also said "we still like it over other Midwest banks like CMA and KEY." Stifel Nicolaus estimates that Fifth Third will earn $1.73 a share in 2014, with an ROA of 1.21%. Fifth Third's shares closed at $16.61 Friday, trading for 9.8 times the consensus 2014 EPS estimate of $1.69. -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn