Discover Tops List of Cheapest Banks With Greatest Returns

NEW YORK ( TheStreet) -- A deep data dive shows there are still bargain bank stocks out there, despite the industry's overall recovery over the past two years.

The KBW Bank Index ( KBW) has returned 25% this year, following a 30% return during 2012.

It's getting harder for investors to identify bank stock bargains, and the continued political and regulatory onslaught against the largest U.S. banks is holding back their valuations. Shares of JPMorgan Chase ( JPM) closed at $51.95 Tuesday and appear very cheaply priced at 8.6 times the consensus 2014 earnings estimate of $6.02 a share among analysts polled by Thomson Reuters. But the company booked a net loss for the third quarter as it set aside litigation reserves and may see another rocky quarter or two over the next year, as it seeks to make multiple settlements with the Department of Justice, regulators and investors.

Many investors will shy away from JPMorgan because of the regulatory uncertainty. They may well be missing out on a bargain long-term play.

For these investors, looking to avoid negative surprises, we have isolated the U.S. banks that have achieved returns on average tangible common equity of over 15% for each of the past five quarters and that trade at the lowest forward price-to-earnings ratios. The data was provided by Thomson Reuters Bank Insight, and was limited to banks for which third-quarter data was available and for which a consensus 2014 EPS estimate was available.

We used returns on average tangible common equity (ROTCE) in order to leave out intangible assets, such as goodwill, and to leave out earning paid out to preferred shareholders.

We have identified 11 actively traded U.S. bank holding companies achieving ROTCE of over 15% over each of the past five quarters. This approach excludes many possible bargains; however, some of the names are attractively priced when considering the strong returns, relatively low risk and prospect for EPS improvement through share buybacks and increased dividends as excess capital is deployed.

Among this group, Discover Financial Services ( DFS) has the lowest forward price-to-earnings ratio. The company's shares closed at $51.92 Tuesday and traded for 10.2 times the consensus 2014 EPS estimate of $5.07.

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