Bank Stocks Rise Ahead of Fed

NEW YORK ( TheStreet) -- KeyCorp ( KEY) of Cleveland led bank stocks higher on Monday, with shares rising 1.8% to close at $13.26, following a better-than-expected report on U.S. manufacturing growth from the Federal Reserve.

The Dow Jones Industrial Average rose 0.8%, while the S&P 500 was up 0.6% and the NASDAQ Composite added 0.7%, after the Fed reported that U.S. industrial production rose 1.1% in November, which was a much stronger increase than the average estimate of 0.6%, among economists polled by Reuters.  During October, industrial production had risen just 0.1%, with the federal government being partially shut down for the first half of the month.

U.S. industrial capacity utilization rose 0.8% to 78.4%, which was still below the nation's long-term average of 79.0% from 1972 to 2012, according to the Federal Reserve.

Also on Monday, the Bureau of Labor Statistics made an upward revision to its estimate for third-quarter nonfarm productivity growth in the U.S. to an annual rate of 3% from the previous estimate of 1.9%.  Economists on average expected the revised productivity growth rate to come in at 2.7%.

The KBW Bank Index ( I:BKX) rose 0.7% to 67.11, with all 24 index components ending with gains, except for Citigroup ( C), which was down down slightly to close at $50.88.

The continued flow of improved economic data builds on other recent reports, including the upward revision of the third-quarter gross domestic product growth estimate to an annual rate of 3.6% from the previous estimate of 2.8%, and the decline in the unemployment rate to 7% in November from 7.3%.  But most economists don't think the data is enough for the Fed to taper bond purchases this week.

The Federal Open Market Committee on Tuesday will begin its two-day policy meeting, after which the committee on Wednesday will issue its regular Federal Reserve policy statement.

The big question for investors continues to be whether the FOMC will decide to taper the central bank's "QE3" purchases of long-term U.S. Treasury bonds and agency mortgage-backed securities, or wait until next year to begin slowing the bond purchases.  These purchases have been running at a net pace of $85 billion a month since September 2012. 

Please see Banks Want Two Moves From Fed and Banks Look Forward to Tapering for more on what the tapering and a potential rise in the short-term federal funds rate will mean for banks, and what bankers are expecting.

Most economists expect the Fed to wait until March 2014 to taper bond purchases. However, Standard & Poor's Ratings Services chief economist Beth Ann Bovino on Dec. 5 wrote in a report that the tapering could begin "as soon as this month, depending on the strength of November's economic data and the state of lawmakers' budget negotiations."  Those budget negotiations have surprised many people, with a bipartisan budget deal being passed in the House of Representatives, setting up a likely positive vote in the Senate.

"Overall, it seems clear that the Fed is itching to move away from a balance-sheet approach back to one based on interest rate policy and forward guidance," Bovino wrote.

KeyCorp

KeyCorp's shares have returned 61% this year, compared to a 31% return for the KBW Bank Index.  The shares trade for 1.3 times their reported Sept. 30 tangible book value of $9.92, 13.0 times the consensus 2014 earnings estimate of $1.02 a share, among analysts polled by Thomson Reuters, and for 11.8 times the consensus 2015 EPS estimate of $1.12.

KBW analyst Christopher Mutascio last week included KeyCorp in a list of large-cap bank stocks he believes investors should consider rotating out of for 2014, since the group to generate relatively low returns on equity.

The following chart shows the year-to-date performance of KeyCorp against the KBW Bank Index and the S&P 500:

KEY Chart
KEY data by YCharts

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.



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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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