2 'Best' Bank Stocks Downgraded to 'Underperform'

NEW YORK ( TheStreet) -- Bank stocks have gotten so hot that some analysts are advising investors to stay away from even the strongest performing names.

Sterne Agee analyst Brett Rabatin on Tuesday downgraded Cullen/Frost Bankers ( CFR) of San Antonio and First Financial Bancshares ( FFIN) of Abilene, Texas to "underperform" ratings from "neutral" ratings.

Cullen Frost

Cullen/Frost had $22.6 billion in total assets as of June 30 and is included among the 24 components of the KBW Bank Index ( I:BKX). Cullen Frost's shares returned 37% year-to-date through Monday's close at $73.18, following a return of 6% during 2012. The index returned 30% this year through Monday, following a return of 30% during 2012.

The shares at Monday's close traded for 18.3 times the consensus 2014 earnings estimate of $4.00 a share, among analysts polled by Thomson Reuters. That is a particularly high valuation for a bank of this size in the current environment.

Based on a quarterly payout of 50 cents, the shares have a dividend yield of 2.73%.

Investors place a premium on Cullen/Frost because of the bank's strong and amazingly consistent long-term earnings track record. The bank's mean 10-year return on average assets (ROA) through 2012 was 1.37%, trailing only U.S. Bancorp ( USB) among components of the KBW Bank Index. Cullen/Frost's mean 10-year return on common equity (ROCE) through 2012 was 14.08%, trailing only USB, with a mean ROCE of 18.13% and Wells Fargo ( WFC), which had a mean 10-year ROCE of 15.45%.

But over the 10-year period, Cullen/Frost's minimum annual ROA was a solid 1.12%, with Commerce Bancshares ( CBSH) of Kansas City, Mo., coming in second place among KBW Bank index components, with a minimum ROA of 0.95%. Cullen/Frost's minimum annual ROCE over the 10-year period was 9.76%, in 2009. Only U.S. Bancorp had a higher minimum annual ROCE, of 10.13%, also in 2009.

Then again, at the end of 2009, Cullen/Frost had a tangible equity ratio of 8.56%, according to Thomson Reuters Bank Insight, compared to a much lower 5.91% for USB.

In a note to clients on Tuesday, Rabatin called Cullen/Frost "qualitatively one of the best banks in the country," but added that "2Q13 results were generally disappointing due to underwhelming loan growth (particularly relative to TX peers) and flattish sequential revenue growth."

"We are less optimistic on improvement in profitability vis-à-vis peers and consider the premium valuation (18.5x FY14E vs. TX peer median of 15x) less warranted relative to the fundamentals."

Rabatin's price target for Cullen/Frost's shares is $61.50, and he estimates the company will earn $3.80 a share this year, with EPS growing to $3.97 in 2014, and $4.33 in 2015.

First Financial Bancshares

First Financial Bancshares had $5.0 billion in total assets as of June 30. The stock closed at $62.93 Monday, returning 63% this year, following a 20% return during 2012.

The shares trade for 23.0 times the consensus 2014 EPS estimate of $2.73.

Based on a quarterly payout of 26 cents, the shares have a dividend yield of 1.65%.

"The company is one of the best operated, well-run banks in the country (noting a 1.62% trough ROA through the credit cycle) and we were too conservative when the valuation was a more reasonable 15-16x forward earnings power," Rabatin wrote in a note on Tuesday. "However, with the shares today at 23x our FY14E and receiving what we believe to be the benefit of deploying capital that has yet to appear likely, we think the shares of this high quality company are ahead of themselves."

First Financial reported a very strong Tier 1 leverage ratio of 10.32%, and a ratio of total equity to assets of 11.56%, as of June 30.

Rabatin estimates the company will earn $2.50 a share this year, with EPS rising to $2.69 in 2014 and $2.90 in 2015.

The analyst did include a caveat: "Going Against FFIN is Typically a Bad Idea."

"While we think the shares are likely to underperform small-cap and mid-cap peers in the near term, we feel compelled to point out the consensus rating is already fairly bearish on the shares, as is the level of shares shorted (17% of outstanding)," Rabatin wrote. "Over the longer term we are likely to be more positive on FFIN."

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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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