2 Bank Stock Book Value Bargains

NEW YORK ( TheStreet) -- Sell-side analysts usually steer clear of hanging their bank stock picks on book value these days, but there are still some large banks that look exceedingly cheap on this basis.

There was a time, only a couple of years back, when investors with long-term horizons could easily scoop up big bank stocks trading just above half tangible book value. Depending on the timing of an investment, this approach netted huge gains for mediocre but grossly undervalued money center banks, such as Bank of America ( BAC), whose stock returned 110% during 2012.

Bank of America's stock has returned 21% this year, through Wednesday's close at $13.96. That's just above the company's reported Sept. 30 tangible book value of $13.62 a share.

Many analysts and investors prefer at this point to focus on forward price-to-earnings ratios. Bank of America's shares trade for 10.2 times the consensus 2014 earnings estimate of $1.34 a share, among analysts polled by Thomson Reuters.

Considering BAC's rather low returns on average tangible common equity (ROTCE) -- 6.97% in the third quarter, improving from 0.95% a year earlier, according to Thomson Reuters Bank Insight -- the stock looks rather expensive on a forward price-to-earnings basis. Discover Financial ( DFS), for example, trades at the same forward P/E as Bank of America, and its third-quarter ROTCE was 24.30%, declining from 25.00% a year earlier.

Please see TheStreet's Discover Tops List of Cheapest Banks With Greatest Returns for a discussion of the bank stocks with high ROTCE trading at lowest forward P/Es.

Big Bank Book Value Picks

Shares of Citigroup ( C) closed at $48.62 Wednesday and traded for 0.9 times their reported Sept. 30 tangible book value of $54.52. The stock is also quite cheap on a forward P/E basis, trading just below nine times the consensus 2014 EPS estimate of $5.43.

Citigroup's recovery continues, as the company's runoff assets in the "bad bank" subsidiary Citi Holdings declined 29% year-over-year to $122 billion as of Sept. 30 and represented just 6% of total assets.

Regulatory capital keeps building, and KBW's analyst team earlier this week estimated that Citi will be approved for $7.686 million in common share buybacks following the Federal Reserve's 2014 stress tests in March.

Bank of America Merrill Lynch analyst Erika Najarian rates Citigroup a "buy," with a $58 price target, implying 19% upside for the shares over the next 12 months. "We believe C is one of the more misunderstood banks in that investors view outsized risk in its international operations, but overlook the company's EPS leverage to a US housing recovery," she wrote in a client note on Thursday.

Citigroup is unique among the largest U.S. banks, in that 57% of the company's third-quarter revenue and 63% of its operating profits were derived from operations outside the United States.

Najarian thinks "emerging markets (EM) headline risk" is driving the current discount in Citi's shares. "As such, we think C stock could re-rate to TBV if the next several quarters contain no EM credit quality shocks - especially in light of strong capitalization levels," she wrote.

Goldman Sachs ( GS) closed at $163.52 Thursday and traded for 1.1 times its reported Sept 30 book value of $143.86 a share. The stock trades for 10.6 times the consensus 2014 EPS estimate of $15.43.

Deutsche Bank analyst Matt O'Connor continues to prefer market sensitive banks over regional and asset-sensitive banks, and in a note to clients on Thursday wrote that "4Q capital markets revenues are off to a good start." The record closing for the Dow Jones Industrial Average on Wednesday and the excitement over the Twitter ( TWTR) IPO underlines the case that there's plenty of eagerness among investors to jump into the market.

In addition to a rebound in capital markets revenue in the fourth quarter, the market sensitive banks' compensation "flexibility," and a "typical seasonal uplift in 1Q revenue" all bode well for the market sensitive banks, according to O'Connor. Meanwhile, the large regional banks are expected to continue seeing significant revenue declines as mortgage loan application volume continues to fall.

Among market sensitive banks, Goldman is O'Connor's "top pick," with the analyst's price target of $181 implying 11% upside for the shares. O'Connor cited the stock's low valuation to tangible book value, the company's 9% year-over-year growth of tangible book vaue and wrote that "3Q trading issues are unlikely to repeat in 4Q."

Thursday could turn out to be a strong day for bank stocks, with the European Central Bank announcing that on Nov. 13 it will cut the interest rate on main refinancing operations of the Eurosystem in half to 0.25%.

Shares of Bank of America were up only a penny in early trading to $13.96, while Citigroup was up 1% to $49.09, and Goldman Sachs was up slightly to $163.70.


-- 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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