3 Bank Stocks Cheap to Long-Term Earnings From JPMorgan

NEW YORK ( TheStreet) -- Some regional bank stocks with relatively high valuations to 2014 earnings look like bargain opportunities for investors with much longer-term horizons, according to JPMorgan Chase analyst Steven Alexopoulos.

In several recent articles we've discussed the relatively high valuations of many regional bank stocks to 2014 earnings, while a company with industry-leading returns on equity (even with excess capital) like Discover Financial Services ( DFS) trades at a considerably lower forward price-to-earnings ratio.

Alexopoulos in a report on Monday outlined "30 bank stock ideas across 10 portfolio strategies." For example, his pick for investors looking for a small-cap bank growing at a very fast pace by focusing on loan growth is Signature Bank ( SBNY) ( SBNY). For a mid-cap "pure play on high net worth segment and Silicon Valley growth," the analyst's favorite pick is First Republic Bank ( FRC) of San Francisco.

Signature Bank's stock closed at $105.56 yesterday. Alexopoulos rates the stock "overweight," with a December 2014 price target of $113.00. First Republic closed at $50.43. FRC is also rated "overweight" by Alexopoulos, with a price target of $60.00. For more on both of these fast growers, please see 'Decent' Loan Growth Best Feature of Regional Banks' Q3 Earnings.

"While it has been tough to get excited over the regional banks as a whole given relatively rich sector valuation levels combined with a still weak fundamental outlook, taking a bottoms-up approach we find many attractive long opportunities over various time horizons as well as several short and pair trading ideas," Alexopoulos wrote.

Bank stocks have been on fire this year, with the KBW Bank Index ( I:BKX) rising 28%, adding to last year's 30% gain. Investors are now quite focused on the Federal Reserve, wondering just when the central bank will curtail its purchases of long-term securities, which have been running at a rate of $85 billion per month since September 2012, in an effort to hold-down long-term interest rates. Last week's surprisingly strong report of job creation in the U.S. caused JPMorgan's economists to move up their expected timeline for Fed tapering of bond-buying to January from March-April.

The Fed's main policy tool, the short-term Federal Funds Rate, has been held in a target range of zero to 0.25% since late 2008. The Federal Open Market Committee has repeatedly said that assuming inflation is held in check, the Federal Funds Rate will not be raised until the U.S. unemployment rate falls below 6.5%. The October unemployment rate was 7.3%. While we can't predict just when the U.S. will move into a "more normal" interest rate environment, "the market seems increasingly convinced that the long-term direction of interest rates is higher, a positive catalyst for banks," according to Alexopoulos.

This means that when Fed policy changes and interest rates go up, the banking sector may weather the expected stock market storm much better than other sectors.

Looking at regional banks, Alexopoulos identified three names that appear "cheap on long term earnings," even if their valuations relative to 2014 EPS estimates aren't necessarily attractive. The analyst sorted the list of small-cap and mid-cap banks covered by his firm "on P/E based on long-term earnings (which we peg as 2017 when we see Fed Funds reaching a more normal 4.25% by YE17)." Here are the three names that are cheapest using this approach:

Comerica

Comerica ( CMA) of Dallas has seen its stock rise 50% this year through Monday's close at $44.93. The shares trade for 15.2 times the consensus 2014 earnings estimate of $2.95 a share, among analysts polled by Thomson Reuters. That's a rather high forward price-to-earnings ratio in the current environment.

For the 12-month period ended Sept. 30, Comerica's return on average assets (ROA) was 0.87% and its return on average tangible common equity (ROTCE) was 8.77%, according to Thomson Reuters Bank Insight.

Putting those figures in context, Wells Fargo's ( WFC) stock closed at $42.75 Monday and traded for 10.7 times the consensus 2014 EPS estimate of $4.01. Despite trading at a much lower valuation to the consensus 2013 EPS estimate than Comerica, Wells Fargo has been a much better performer, with a 12-month ROA of 1.53% and ROTCE of 17.58% though Sept. 30.

But Comerica's shares appear attractively priced when Alexopoulos takes his earnings estimates out several years. The shares trade for 7.2 times his 2017 EPS estimate of $6.21.

Comerica is a play on a rising interest rate environment. "At CMA, the company has 85% of loans being floating rate (largely tied to 30-day LIBOR) and 45% of deposits are noninterest bearing," Alexopoulos wrote. This means that when the Federal Reserve eventually begins to allow short-term rates to rise, Comerica will benefit very quickly as its loans reprice upward.

Alexopoulos rates Comerica "overweight." His December 2014 price target for the shares is $14.00.

Zions Bancorporation

Shares of Zions Bancorporation ( ZION) of Salt Lake City close at $29.21 Monday. The shares have returned 37 % this year and trade for 15.9 times the consensus 2014 EPS of $1.84.

Looking much further ahead to bake in Alexopoulos' expectations for continued improvement in the company's return on equity, the shares trade for just 7.5 times his core 2017 EPS estimate of $3.89.

But Alexopoulos has a neutral rating on Zions Bancorporation, as the company's return on tangible equity is "still below its cost of capital."

Zions' ROA was 0.67% and its ROTCE was 8.5% for the 12-month period ended Sept. 30, according to Thomson Reuters Bank Insight.

The analyst's December 2014 price target for Zions is $31.00.

KeyCorp

Shares of KeyCorp of Cleveland closed at $12.96 Friday. The shares have returned 56% this year and trade for 12.7 times the consensus 2014 EPS estimate of $1.02.

The company's ROA for the past 12 months through Sept. 30 was 1.00%, while its ROTCE was 10.00%, according to Thomson Reuters Bank Insight.

Looking way ahead, KeyCorp trades for 7.6 times Alexopoulos' 2017 EPS estimate of $1.70.

The analyst also sees KeyCorp as a current value play among mid-cap banks he covers, since the shares trade at 12.2 times his 2014 EPS estimate of $1.06, which represents a "26% discount to the group."

"Although the list of value names in the mid- and small-cap bank space has thinned with the YTD move in the stocks, we still find KEY trading at one of the cheapest valuations and view the stock as positioned to outperform over the next year as the positive operating leverage story takes over and the turnaround bears fruit," Alexopoulos wrote.

His December 2014 price target for KeyCorp is $14.00.

-- 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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