Regional Banks Stocks Rise Despite EPS Projections (Update 1)

Updated from 7:00 a.m. ET with comments from BMO Capital Markets analyst Peter Winter.

NEW YORK ( TheStreet) -- As large regional banks report earnings over the next two weeks, analysts aren't likely to hike their earnings estimates. Investors, on the other hand, probably won't care.

Even though 2014 earnings estimates for many banks have risen very little or even dropped this year, share prices have steadily climbed, with the KBW Bank Index ( I:BKX) up 23% through Friday, following a 30% return for the index during 2012.

What has happened is the market's valuation of bank stocks relative to book value and earnings estimates has risen as investors have grown much more comfortable with the notion of a much stronger banking sector.

For example, shares of SunTrust ( STI) on Jan. 3 closed at $28.40. The shares at that time traded for 1.1 times their reported Sept. 30, 2012 tangible book value of $25.72, and 9.5 times the consensus 2014 earnings estimate at that time of $3.00 a share, among analysts polled by Thomson Reuters.

Based on Friday's closing price of $32.99, SunTrust's shares now trade for 1.3 times their reported June 30 tangible book value of $26.08, and for 11.2 times the consensus 2014 EPS estimate of $2.95.

So SunTrust's shares rose 16% from Jan. 3 through Friday, with the forward price-to-earnings ratio rising significantly, even though analysts' opinion about the company's earnings prospects for 2014 soured slightly.

Bank of America ( BAC) also underlines investors' rising confidence for most of the big banking players. The company's shares closed at $14.05 Friday and traded for 1.1 times their reported June 30 tangible book value of $13.32 and 10.3 times the consensus 2014 EPS estimate of $1.36. The shares have returned 21% this year.

Bank of America's closing price at the end of 2012 was $11.58. At that time, the shares traded at much lower multiples of 0.9 times their Sept. 3, 2012 reported tangible book value of $13.48 and 9.3 times the then-consensus 2014 EPS estimate of $1.25. Rising home prices and lower expenses related to problem loans and repossessed real estate, as well as other efficiency gain through CEO Brian Moynihan's "Project BAC," have greatly boosted investors' confidence in the stock.

Please see TheStreet's Big 4 Bank Earnings Preview for more on the difficult third-quarter earnings comparisons ahead for Bank of America, JPMorgan Chase ( JPM), Wells Fargo ( WFC) and Citigroup ( C).

The biggest U.S. banks are expected by Atlantic Equities analyst Richard Staite to see a 20% year-over-year decline in trading revenue, reflecting investors' hesitation to trade during August and September, leading to an expected tapering of Federal Reserve bond purchases, which didn't happen following the Federal Open Market Committee's most recent two-day meeting that ended Sept. 18.

Staite also said in his earnings preview for eight of the nation's largest banks on Sept. 23 that he expected the group's third-quarter mortgage revenue to be down 45% from the second quarter and 55% from a year earlier, although he expected the group's operating revenue -- excluding debit and credit valuation adjustments and losses from mortgage loan repurchases -- to decline only 5% from a year earlier.

The main reason for the mortgage decline -- which will also affect many smaller regional banks -- is the ending of the mortgage refinancing boom amid a rise in long-term interest rates. The Mortgage Bankers Association estimates total U.S. mortgage loan production volume will decline from $1.750 trillion in 2012 to $1.605 trillion this year, with a much sharper decline to $1.091 trillion in 2014.

That will make for at least four quarters of tough mortgage revenue comparisons for many large regional banks, and investors can continue to see an emphasis on expense control, with a continued stream of layoffs.

Investors who have grown used to a steady improvement of banks' earnings over the past year may be in for some rude surprises.

"Mortgage challenges aside, 3Q fundamentals should be fine with loans up a bit, net interest margins less pressured, credit better, and expenses well-controlled," according to Jefferies analyst Ken Usdin. However, while he believes that third-quarter earnings estimates are "achievable," he wrote in his third-quarter regional banks earnings preview on Sept. 26 that he sees "few catalysts for positive revisions" of earnings estimates.

Here are quick summaries of what investors can expect for the third quarter for the 10 largest publicly traded U.S. regional banks:
  • U.S. Bancorp (USB) of Minneapolis is scheduled to announce its third-quarter results on Oct. 16. Analysts polled by Thomson Reuters estimate the company will post third-quarter earnings of $1.404 billion, or 76 cents a share, matching earnings-per-share in the second quarter, but increasing from 74 cents in the third quarter of 2012. USB's shares closed at $36.62 Friday and traded for 11.4 times the consensus 2014 EPS estimate of $3.20.
  • PNC Financial Services Group (PNC) of Pittsburgh will report its third-quarter results on Oct. 16, with analysts estimating earnings of $879 million, or $1.63 a share, down from $1.99 a share the previous quarter and $1.64 a year earlier. PNC's shares closed at $72.18 Friday and traded for 10.4 times the consensus 2014 EPS estimate of $6.92.
  • BB&T (BBT) of Winston-Salem, N.C., is scheduled to report on Oct. 17, with analysts estimating third-quarter earnings of $479 million, or 71 cents a share, declining from 77 cents the previous quarter, but increasing from 66 cents a year earlier. BB&T's shares closed at $33.67 Friday and traded for 10.9 times the consensus 2014 EPS estimate of $3.08.
  • SunTrust of Atlanta will announce its third-quarter results on Oct. 18, with analysts estimating earnings of $376.8 million, or 69 cents a share, up from 68 cents the second quarter, but down from $1.98 in the third quarter of 2012, when the company sold its shares of Coca-Cola (KO). That sale resulted in a pretax profit of $1.9 billion, partially offset by various other actions taken "to improve the Company's risk-profile."
  • Regions Financial (RF) of Birmingham, Ala., will report its third-quarter results Oct. 22, with analysts expecting earnings of $303 million, or 21 cents a share, compared to 18 cents in the second quarter and 21 cents in the third quarter of 2012. Regions' shares closed at $9.43 Friday and traded for 10.7 times the consensus 2014 EPS estimate of $88 cents.
  • KeyCorp (KEY) of Cleveland will report on Oct. 16, with analysts expecting third-quarter earnings of $204 million, or 22 cents a share, matching EPS for the previous quarter, but down a penny from 23 cents a year earlier. KeyCorp's shares closed at $11.64 Friday and traded for 11.6 times the consensus 2014 EPS estimate of $1.00.
  • M&T Bank (MTB) of Buffalo, N.Y., is expected by analysts to post third-quarter earnings of $280 million, or $2.08 a share, declining from $2.55 the previous quarter and $2.17 a year earlier. The expected sequential earnings decline reflects higher expenses associated with the company's "major initiative" to improve "procedures, systems and processes relating to M&T's Bank Secrecy Act and anti-money-laundering compliance program." M&T made that announcement in April, when it also announced its deal to acquire Hudson City Bancorp (HCBK) of Paramus, N.J. would be delayed because of regulatory compliance concerns. M&T's shares closed at $112.83 Friday and traded for 12.7 times the consensus 2014 EPS estimate of $8.90.
  • Comerica (CMA) of Dallas is scheduled to report on Oct. 16, with analysts estimating third-quarter earnings of $132 million, or 71 cents a share, declining from 76 cents the previous quarter, but increasing from 61 cents a year earlier. Comerica's shares closed at $39.62 Friday and traded for 13.8 times the consensus 2014 EPS estimate of $2.87.
  • Huntington Bancshares (HBAN) of Columbus Ohio, will announce its third-quarter results on Oct. 17, with analysts estimating earnings of $146 million, or 17 cents a share, matching EPS for the second quarter and declining from 19 cents in the third quarter of 2013. Huntington's shares closed at $8.45 Friday and traded for 11.9 times the consensus 2014 EPS estimate of 71 cents.

BMO Capital Markets analyst Peter Winter in his research team's third-quarter industry earnings preview on Thursday presented a more negative mortgage outlook: "We expect mortgage banking fees to be down 77% annualized," he wrote. Winter included Fifth Third Bancorp, Wells Fargo and SunTrust in a group of banks that are "the most exposed to mortgage banking fee income," while writing that Zions Bancorporation ( ZION) of Salt Lake City and KeyCorp "have minimal exposure."

According to Winter, the decsion by the Federal Open Market Committee last month not to have the Federal Reserve taper its bond purchases poses "a clear risk" to loan growth in the fourth quarter. But the market's hysteria over Fed policy has not altered BMO's longer-term view on the banking sector. " W e view the Fed's decision as temporary and have not altered our 2014 expectations for a pick-up in loan growth driven by a gradual improvement in the economy," Winter wrote.

Out of 12 large regional banks covered by Winter, the analyst has "outperform" ratings on three names, including Fifth Third, with a price target of $22; KeyCorp, with a price target of $14; and Regions Financial, with a price target of $9.27.

-- 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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