NEW YORK ( TheStreet) -- It's been a banner two-year run for bank stocks but, although the economy is expected to continue to improve, this year's high flyers may not be winning picks for 2014.
The KBW Bank Index ( I:BKX) has risen 30% this year, following a 30% gain during 2012. All 24 components of the index have seen year-to-date returns -- assuming the reinvestment of dividends -- of at least 20%, except for Northern Trust ( NTRS) of Chicago, which was up 17% through Wednesday's close at $57.17, and M&T Bank ( MTB) of Buffalo, N.Y., which was up 19% to $113.81.
"One might look at the outperformance over the past two years and suggest a pull-back or consolidation of the gains is warranted. However, the solid outperformance (in a vacuum) does not necessarily mean the large cap banks are now overvalued," according to KBW analyst Christopher Mutascio.
There are several factors leading to a prediction by Mutascio that large-cap banks covered by his firm will see core earnings-per-share growth of just 2% during 2014, slowing from an estimated 16% this year. For starters, the release of excess loan loss reserves that has been boosting earnings over the past several years is expected to slow, as is the rate of expense decline as loan servicing and other credit-related costs go down. Another year of slowing mortgage refinance applications, brought about by a rise in long-term interest rates is also expected to slow overall mortgage fee revenue.
Despite the rise in long-term interest rates, most market watchers expect the Federal Reserve to keep the short-term federal funds rate in a target range of zero to 0.25% at least until 2015. For most banks, this means a continuation of a hostile rate environment and pressure on their net interest margins.
"It is clear that 2013 has been the year for low [price-to-tangible-book-value] P/TBV bank stocks," Mutascio wrote Wednesday in KBW's 2014 Outlook for large-cap bank stocks. "Within [Mutascio's coverage of 11 large-cap U.S. banks], the top four banks with the greatest year-to-date returns all have at least one thing in common -- they have P/TBV multiples that are below the group's average," the analyst wrote.
According to Mutascio, based on Monday's closing market data, KeyCorp ( KEY) of Cleveland, Huntington Bancshares ( HBAN) of Columbus, Ohio, Regions Financial ( RF) of Birmingham, Ala., and Bank of America ( BAC), "saw an average year-to-date return of 41.9% versus the average return for the remaining seven banks under our coverage of 27.3%. So, the low P/TBV stocks thoroughly outperformed the broader market return of 26.8% while the average returns of the remaining banks has been pretty much in line with the S&P 500."
A major catalyst for the big banks over the past two years has been investors' believe that the stocks were just too cheaply valued, since the credit crisis was coming to an end.
"With the banks already trading above their 18-year norm relative to the S&P 500 and outperforming nicely the past two years, what would cause further outperformance for the group in 2014? In our view, the catalyst for continued outperformance would now have to come from growth (not valuation), which leads us to the second reason why we think bank stock outperformance is less likely in 2014."