Big Banks: Financial Winners

NEW YORK ( TheStreet) -- Bank of America ( BAC), Citigroup ( C) and Wells Fargo ( WFC) were the bank stock winners on Monday, with shares of all three companies rising 2%.

Shares of Bank of America closed at $13.28, while Citigroup closed at $49.52 and Wells Fargo closed at $42.83.

With investors looking ahead to the beginning of second-quarter earnings season, the broad indices all advanced. The KBW Bank Index ( I:BKX) was up 0.6% to close at 64.29, with 14 out of 24 index components showing gains. The index hit a new 52-week closing high, adding to Friday's 3% gain. Friday's strong action followed a report from the Bureau of Labor Statistics that the U.S. added 195,000 nonfarm jobs during June. The May job-growth figure was also revised upward to 195,000 from 175,000.

In a note to clients on Monday, Deutsche Bank analyst Greg Poole wrote that the year-to-date average monthly nonfarm jobs gain of 202,000 was "substantially better than the +94k (initially reported) three-month trend that had prevailed last September at the time of QE3, and therefore the latest labor news keeps the Fed on track to begin tapering in the current quarter."

The Federal Reserve has been making monthly purchases of $85 billion in long-term securities since September. The market has anticipated a curtailment of the central bank's bond-buying, by sending the yield on 10-year U.S. Treasury bonds to 2.66% Monday afternoon, rising dramatically from 1.70% at the end of April. The 10-year bond seemed to stabilize on Monday, with the yield dropping 9 basis points from Friday, when the yield had risen by 21 basis points.

Staying Neutral but Raising the Target

Wells Fargo and JPMorgan Chase ( JPM) will kick off earnings season for large-cap U.S. banks on Friday.

The consensus among analysts polled by Thomson Reuters is for Wells Fargo to report second-quarter earnings of 92 cents a share, matching the company's results for the first quarter, but increasing from 82 cents a share in the second quarter of 2012.

A major concern for Wells Fargo has been the decline in mortgage loan refinancing volume. The company was the dominant U.S. mortgage player during 2012, with a 27.7% share of newly originated loans. Another threat to mortgage revenue is the decline in gains on the sale of newly originated mortgage loans to Fannie Mae and Freddie Mac as interest rates rise.

On the positive side, higher long-term rates will ultimately translate to widening net interest margins. Higher long-term rates also mean that Wells Fargo will report rising valuations for its mortgage servicing rights.

Wells Fargo's shares have returned 27% this year, following a 27% return during 2012. The shares trade for 11 times the consensus 2014 EPS estimate of $3.91. The consensus 2013 EPS estimate is $3.71.

Citigroup analyst Keith Horowitz has a neutral rating on Wells Fargo, but on Sunday raised his price target for the shares to $45 from $41, based on his upward revisions of earnings estimates, "to account for the benefit from higher rates as a steepening yield curve eventually works its way into net interest income."

Horowitz raised his 2013 EPS estimate for Wells Fargo by a nickel to $3.80, raised his 2014 EPS estimate by a dime to $4.05, and raised his 2015 EPS estimate by 20 cents to $4.40.

"We see core mortgage production revenues falling 15% q/q in 2Q13, on narrower gain-on-sale margins," Horowitz wrote in a note to clients. Wells Fargo saw only a slight sequential decline in mortgage revenue during the first quarter, because it books gains-on-sale when loans are closed, rather than when a new loans rate is locked-in.

"We believe the spread compression in 1Q will catch up to WFC in 2Q and we see gain-on-sale margins falling 25% q/q, partly offset by a 4% q/q increase in originations, in line with industry forecasts," Horowitz wrote.

WFC Chart WFC data by YCharts

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.

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-- 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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