NEW YORK ( TheStreet) -- "With investors becoming more hesitant about an extended bank stock market, we see less value than earlier in the year." Sterne Agee analyst Brett Rabatin's above comment in a note to clients on Thursday sums up the changing landscape for investors looking for bargain bank stock picks. Over the last few years, as the banking industry has recovered from the credit crisis, investors have been able to pretty much rely on a continued upward movement in earnings, while also enjoying plenty of heavily discounted stocks to pick from. But the KBW Bank Index ( I:BKX) has returned 18% this year, following a 30% increase during 2012. The KBW Regional Bank index is up 13% year-to-date, after rising 10% last year, showing that the smaller banks had not fallen quite as far as the large-cap banks. "Clearly 1Q13 earnings for many institutions were not impressive enough to move estimates higher," Rabatin wrote, "with generally weak revenues and those beating expectations generally doing so on lower expenses." The focus on cutting expenses has been a major theme for many of the nation's largest banks, which feature branded cost-cutting programs, including Bank of America's ( BAC) "Project New BAC," Wells Fargo's ( WFC) "Project Compass," and some cute names, such as KeyCorp's ( KEY) "Keyvolution" program, and SunTrust's ( STI) "Playbook for Profitable Growth." Other major cost-cutters, including Citigroup ( C), have chosen not to put an attractive name on cost-cutting moves that cost many thousands of employees their jobs. The industry's depressing focus on lowering expenses underscores the reality of a hostile market environment, including historically low interest rates, that continue to narrow net interest margins (NIM) for most banks. Meanwhile, mortgage lending volumes are down significantly this year, and for commercial and industrial lending -- a high point for loan demand over the past couple of years -- loan pricing is "getting unruly," according to Rabatin. "As such, we view the institutions with less commoditized lending operations as likely to have less NIM pressure than peers," Rabatin wrote.
Western Bank Stock Picks
"With investors becoming more hesitant about an extended bank stock market, we see less value than earlier in the year," Rabatin wrote. "We have already lowered recommendations on some of our favorite growth companies such as SVB Financial ( SIVB) to a neutral rating ... as the valuations fully reflect the fundamentals in the environment, in our view." Among the 22 Western banks covered by Sterne Agee, "there are a select few institutions... that should still be looked at as having upside relative to the group in the environment," according to Rabatin: