Citi, JPM Seen as Best Bank Stocks for Tepid 2H

NEW YORK ( TheStreet) - With the sector soaring so far this year, bank stocks may be pressured in the last four months, and "the banks best positioned are those institutions that can grow revenues, effectively manage expenses and deploy capital," according to Credit Suisse analyst Moshe Orenbuch.

"For 2013, we rank C and JPM at the top of this list," Orenbuch wrote in note to clients late Wednesday.

As TheStreet outlined in 5 Cheapest Bank Stocks last month, shares of Citigroup ( C) and JPMorgan Chase ( JPM) trade at very low multiples to forward earnings estimates, when compared to their large bank peers, and even when compared to smaller regional banks.

Orenbuch rates both stocks "Outperform," with a $60 price target for Citigroup and a price target of $65 for JPMorgan.

Citi's shares closed at $49.60 Wednesday and traded for 9.1 times the consensus 2014 earnings estimate of $5.46 a share, among analysts polled by Thomson Reuters.

JPMorgan Chase closed at $51.87 Wednesday. The shares traded for 8.5 times the consensus 2014 EPS estimate of $6.11.

Here's how those valuations stack up against the other two members of the "big four" U.S. banking club:

Bank of America's ( BAC) shares traded for 10.5 times the consensus 2014 EPS estimate of $1.36, based on Wednesday's close at $14.32.

Despite being consistently the most profitable among the big four, Wells Fargo's ( WFC) shares are slightly cheaper on a forward P/E basis than Bank of America's shares, closing at $41.50 Wednesday, or 10.3 times the consensus 2014 EPS estimate of $4.02.

Citigroup

In his review of management commentary for the largest U.S. banks during the first half of 2014, Orenbuch highlighted the return of positive operating leverage in Citigroup's Latin American and Asia businesses during the second quarter. Citi expects to continue for the rest of 2013, which is especially important, as 57% of the company's revenue during the second quarter came from outside the United States. This makes Citigroup a unique play among the big four.

Citigroup estimated that its Basel III Tier 1 common equity ratio was 10.0% at the end of the second quarter, putting the company in fully compliance with the Federal Reserve's minimum requirement of 7.0% plus an additional 2.5% buffer as a global systemically important financial institution (GSIFI) years ahead of the January 9.5% several years ahead of the January 2019 due date.

Citigroup also estimated that its Basel III supplementary Tier 1 leverage ratio was 4.9% as of June 30, putting it close to full compliance with federal regulators' new minimum requirement of 5% for holding companies, ahead of a January 2018 deadline. Citi estimated its main banking subsidiary was already in compliance with a 6% Basel III supplementary Tier 1 leverage ratio minimum requirement.

The bank's executives also said Citi would be able to meet its goal of $900 million in annual cost savings this year.

The company reported a second-quarter return on average assets (ROA) of 0.89% and a return on average common equity (ROE) of 8.8%. Citigroup's near-term goals are to improve ROA to a range of 0.90% to 1.10%, and a return on tangible equity of over 10%.

Citi was cautious early this year when it submitted its 2013 capital plan to the Federal Reserve, being granted approval for up to $1.2 billion in share buybacks through the first quarter of 2014, while leaving its dividend on common shares at just a penny a share.

The company's improved efficiency, increasing earnings and strong capital levels should bode well during the next round of Federal Reserve stress tests in March of next year. Citigroup's lack of recent negative headlines -- especially when compared to JPMorgan -- may also help support the stock.

C Chart C data by YCharts

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

JPMorgan Chase

Most investors are well aware of JPMorgan's elevated headline risk, with seemingly daily leaks by federal authorities of civil and criminal investigations of the company, A the bank faces roughly a dozen federal investigations.

The company is facing fines ranging from $500 million to $600 million springing from investigations of the "London Whale" hedge trading debacle, which resulted in pretax losses of at least $6.2 billion during 2012. JPMorgan last month agreed to pay $410 million in penalties and "disgorgement to ratepayers" to settle the Federal Energy Regulatory Commission's charges of energy market manipulation.

The fines are adding up, but the company is still quite a money maker, booking a second-quarter profit of $6.5 billion, or $1.60 a share.

There's plenty of hope for JPMorgan to end 2013 with another strong performance, despite the regulatory overhang. After all, during 2012, JPMorgan achieved its third consecutive earnings record of $21.3 billion, or $5.20 a share, despite the London Whale.

JPMorgan in March received only "conditional" approval of its 2023 capital plan, but the company did receive the Fed's approval to increase its quarterly dividend to 38 cents from 30 cents, and for up to $6 billion in share buybacks through the first quarter of 2013.

It remains to be seen what approach the company will take when filing its 2014 capital plan with regulators. Meanwhile, JPMorgan's common shares have an attractive dividend yield of 2.93%.

Investors can expect to see loads of additional headlines about the bank, as federal regulators continue timing their leaks to ensure several days of news items for each investigation. All the bad news is likely to continue to weigh on the shares over the short-term, but seems unlikely to keep the company from bringing home a decent bottom line.

Because of JPMorgan's unique circumstances, investors could be looking at quite an opportunity to load up on shares of a stable, steady and strong earnings performer, at a bargain price.

JPM Chart JPM data by YCharts

Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.

-- 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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