Midwest Banks Lead as Unemployment Drops

NEW YORK ( TheStreet) -- Midwest regional Bank stocks on Friday had a very strong showing, as investors cheered stronger-than-expected November employment numbers.

The Dow Jones Industrial Average was up 1.3%, while the S&P 500 added 1.1% and the NASDAQ Composite  rose 0.7% after the Department of Labor announced that the U.S. unemployment rate for November improved to 7.0% from 7.3% in October.  Economists polled by Reuters on average had estimated the unemployment rate would only improve slightly, to 7.2%.

The Labor Department also said the U.S. economy had added 203,000 nonfarm jobs during November, coming in ahead of the consensus estimate of 182,000.

The November unemployment rate is the lowest in five years.  Here's the unemployment picture over the last decade:

The Labor Department also revised revised previous nonfarm job-growth numbers upward, to 174,000 from 153,000 for September and to 204,000 from 200,000 for October.

The KBW Bank Index ( I:BKX) rose 1.4% to 67.41, with all 24 index component showing gains.  U.S. Bancorp ( USB) of Minneapolis was the leader among large-cap banks, with shares rising 2.7% to close at $39.65.  Other major Midwest players showing strong gains included Fifth Third Bancorp ( FITB) of Cincinnati, which was up 2.6% to $20.34, and Huntington Bancshares ( HBAN) of Columbus, Ohio, which rose 2.6% to $9.24.

All eyes this week were on the Friday unemployment figure, however, there's been plenty of other good news this week.  The Bureau of Economic Statistics on Thursday made a major upward revision of its estimate for third-quarter U.S. gross domestic product growth to an annual rate of 3.6% from the previous estimate of 2.8%. 

Also on Thursday, the Department of Labor said initial U.S. unemployment claims for the week ended Nov. 30 declined by 23,000 from the previous week to 298,000.  Economists on average had expected jobless claims to total 329,000.

Friday's good news outweighed stock investors' fears of higher long-term interest rates, once the Federal Reserve begins to lower its "QE3" purchases of long-term U.S. Treasury bonds and agency mortgage-backed securities.  The bond purchases have been running at a net pace of $85 billion a month since September 2012.  The Federal Open Market Committee's next policy meeting is scheduled for Dec. 17-18, so investors should expect the usual pattern of tension and volatility heading into the release of the committee's policy statement in the afternoon on Dec. 18. 

Deutsche Bank's analyst team in a report early Monday, before the unemployment numbers were released, wrote that "As the October FOMC minutes highlighted, a taper is possible over the next several Fed meetings. That includes a Dec-taper in our view, especially if today's employment data net of revisions surprises to the upside."

Well, today's unemployment numbers certainly did surprise to the upside.  Deutsche Bank's team added: "Remember the Fed did not have either the Q3 GDP or the October employment data when they met in October, and both reports were much stronger than expected."

Sterne Agee chief economist Lindsey Piegza offered a differing opinion, writing in an afternoon client note that the better-than-expected growth in U.S. payrolls was set a "stronger tone but not enough to move Fed in December."

"So the question we have to ask, 'Are two consecutive months of +200k enough to establish a trend and definitively prove the labor markets are strong enough to withstand a rollback of QE?' We don't believe so," Piegza wrote.  She cited "lackluster preliminary Black Friday weekend sales," when concluding that consumers appear "to be just treading water."  Piegza also noted that U.S. payrolls would have to grow at a pace of 245,000 a month, "just to cover demographic change, let alone replace all of the jobs lost during the recession."

Midwest Banks

Here are valuation ratios and earnings estimates, along with returns on average assets (ROA) and returns on average tangible common equity for the three Midwest banks listed above, for the first three quarters of 2013, according to data provided by Thomson Reuters Bank Insight:

  • U.S. Bancorp's shares trade for 3.0 times tangible book value for 12.4 times the consensus 2014 earnings estimate of $3.20 a share.  The consensus 2015 EPS estimate is $3.46.  The company's ROA during the first three quarters of 2013 was 1.66%, while its ROTCE was a very strong 24.18%.
  • Fifth Third Bancorp trades for 1.6 times tangible book value for 11.7 times the consensus 2014 EPS estimate of $1.74.  The consensus 2015 EPS estimate is $1.89.  The company's ROA during the first three quarters of 2013 was 1.56%, while its ROTCE was 16.41%.
  • Huntington Bancshares trades for 1.5 times tangible book value for 12.8 times the consensus 2014 EPS estimate of 72 cents.  The consensus 2015 EPS estimate is 80 cents.  The company's ROA during the first three quarters of 2013 was 1.15%, while its ROTCE was 12.76%.

The following chart shows the year-to-date price performance of the three Midwest names, against the IBW Bank Index:

USB Chart data by YCharts


-- 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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