Regional Banks: Financial Losers

NEW YORK ( TheStreet) -- Large regional banks were losers on Thursday, on the prospect of relatively weak third-quarter results.

The KBW Bank Index ( I:BKX) was down 0.3% to close at 62.53, with 14 of the 24 index components ending with declines. Large regional banks with shares pulling back 1% included Comerica ( CMA) of Dallas, which closed at $39.27; Huntington Bancshares ( HBAN) of Columbus, Ohio, at $8.27; KeyCorp ( KEY) of Cleveland, at $11.34; PNC Financial Services Group of Pittsburgh ( PNC), at $72.44; and Regions Financial ( RF) of Birmingham, Ala., which closed at $9.18.

In his firm's third-quarter earnings preview for U.S. Regional banks, Credit Suisse analyst Nick Karzon late on Wednesday wrote that "lower mortgage banking revenues are still not fully embedded in consensus EPS estimates," for many banks.

Third-quarter mortgage revenue is expected to drop in the double digits for many large banks, as refinance applications have slowed considerably on rising long-term interest rates. Gain-on-sale margins for new residential loans sold to Fannie Mae ( FNMA) and Freddie Mac ( FMCC) will also be sharply lower, because of the rise in long-term rates.

Karzon didn't change his third-quarter estimates for the regional banks covered by Credit Suisse, however, he estimated that BB&T ( BBT) of Winston-Salem, N.C., would see its third-quarter mortgage loan origination volume decline to $7.0 billion from $9.3 billion during the second quarter. For Regions Financial, the analyst estimated origination volume would see a sequential decline to $1.5 billion from $1.9 billion, while for SunTrust ( STI) of Atlanta, Karzon estimated a decline in mortgage loan origination volume to $7.4 billion in the third quarter from $9.1 billion in the second quarter.

JPMorgan's Settlement Saga

Shares of JPMorgan Chase ( JPM) rose 0.4% to close at 51.89, after an early report from the Wall Street Journal saying that the bank's eventual settlement of multiple criminal and civil investigations by the Department of Justice, other federal regulators and states' attorneys general could be as high as $11 billion. Settlement figures of between $3 billion and $11 billion have been bandied about in various media reports this week.

But Thursday was different, as JPMorgan Chase CEO James Dimon met with Attorney General Eric Holder. In a press conference following the meeting, Holder limited his prepared comments to "significant enforcement developments in the Justice Department's efforts to crack down on price fixing and bid rigging in the automobile parts industry."

When asked about his meeting with Dimon, Holder said he "did meet with representatives of JPMorgan," and that he expected "to be making further announcements in the coming weeks, the coming months." The attorney general refused to discuss the details of his conversation with Dimon, but did say "this is something of a priority."

In a piece originally published by RealMoney, Jim Cramer reacted to the possible $11 billion settlement by concluding that "If JPMorgan Chase can actually get the federal and state authorities to sign a piece of paper saying they can only sue the bank for future infractions in the mortgage market and not past ones, then JPMorgan will have gotten a huge bargain. It could be fabulous for the bank."

That's because even a giant legal settlement that could wipe out third-quarter earnings would "clean the slate" for the company's stock to be considered by investors relative to its "normalized earnings."

Until a settlement is reached, "we are stuck in some world where we don't know what this bank, the envy of the industry, can really earn. Right now the Street is clustered at around $6 in earnings power for next year.

Oppenheimer analyst Chris Kotowski on Thursday cut his third-quarter earnings estimate for JPMorgan Chase in half to 70 cents a share, factoring-in an estimated $5 billion hit to earnings from a legal settlement. In his third-quarter earnings preview for large-cap banks, the analyst wrote "We obviously have no idea what it will be, but in putting a $5B assumption into our estimate, we want to point out that even this amount would leave JPM with earnings comfortably above its dividend."

JPMorgan's quarterly dividend on common shares is 38 cents, for a yield of 2.93%. The bank's stock is cheapest among all large-cap U.S. banks, trading for just 8.5 times the consensus 2013 EPS estimate of $6.08, among analysts polled by Thomson Reuters.

Despite his third-quarter estimate cut, Kotowski reiterated his "outperform" rating for JPMorgan, with a price target of $71.00.

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-- Written by Philip van Doorn in Jupiter, Fla.

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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.