According to Mutascio, the offsets to lower mortgage volume and lower gains on mortgage loan sales include increased income from loan servicing, the "eventual reduction" in mortgage repurchase requests from investors, declining expenses following the recent industry foreclosure settlement with federal regulators, and the elimination of forgone revenue from the retention of mortgage originations."

Stifel Nicolaus estimates that Wells Fargo will earn $3.59 a share this year, with EPS increasing to $3.83 in 2014.

When discussing his upgrade of U.S. Bancorp, Mutascio wrote that "investors have the potential to earn significantly higher profitability and invest in one of the strongest management teams in the industry at a discount."

Mutascio's price target for U.S. Bancorp is $39, and he estimates the company will earn $3.08 a share this year, increasing to $3.25 a share in 2014. The analyst wrote that U.S. Bancorp's shares trade "at a lower P/E multiple than both Comerica ( CMA) and KeyCorp ( KEY) despite a projected ROA of 1.62% (versus just 0.75% for CMA and 0.94% for KEY)."

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.

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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