Do Not Chase All Cheap Bank Stocks: KBW

NEW YORK ( TheStreet) -- Investors late to the bank stock rally may prefer to load up on "cheap" bank stocks, but not all of them are necessarily bargains.

According to KBW analyst Christopher Mutascio, investors have been buying stocks that trade at low price-to-tangible book multiples on the premise that such stocks would have more upside as they are currently "under-earning."

"That may or may not be the case," the analyst wrote, adding, "Some banks may be 'cheap' on a P/TBV measure because they have materially lower-than-peer profitability today and in the future. So their discounted P/TBV multiple may be justified and warranted."

Banks such as Keycorp ( KEY), SunTrust ( STI) and Regions Financial ( RF) all trade at low price-to-book values but are relatively expensive on a price-to-earnings basis.

For these banks to achieve "industry-like profitability" -- a return on tangible equity (ROTE) of 12.6% and return on assets (ROA) of 1.21%, investors will have to make "some pretty aggressive assumptions."

These banks may struggle to achieve such targets given the fact that fee income is unlikely to move the needle, in the analyst's opinion, while loan loss provisioning is already well below historical levels. That means the only two drivers of profitability would be net interest margins and efficiency ratio.

For Keycorp to earn a ROTE of 12.6%, it will have to generate a net interest margin of 4% and an efficiency ratio of 52% or a combination of 3.6%/55.3%. That compares to a NIM of 3.3% and efficiency ratio of 67.2%.

Regions will have to earn a NIM of 3.5% and efficiency ratio of 54.7% compared to current levels of 3.13% and 64.9%.

SunTrust will have to generate NIM of 3.53% and efficiency ratio of 59% compared to 3.33% and 60.2% -- "the most feasible of the three banks" in Mutascio's view.

-- Written by Shanthi Bharatwaj in New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

More from Stocks

Why The FANG Stocks' Dominance May Not Be So Bad For The Market

Why The FANG Stocks' Dominance May Not Be So Bad For The Market

Danica Patrick's Final Race at 2018 Indianapolis 500: What She Thinks About Cars

Danica Patrick's Final Race at 2018 Indianapolis 500: What She Thinks About Cars

At End of May, Investors Signalling They May Stay Away

At End of May, Investors Signalling They May Stay Away

Inside Carnival's Mind Blowing New Horizon Cruise Ship (Video)

Inside Carnival's Mind Blowing New Horizon Cruise Ship (Video)

Neel Kashkari: The Heart of Our Financial System Is More Radioactive Than Ever

Neel Kashkari: The Heart of Our Financial System Is More Radioactive Than Ever