He added that "A safer earnings stream [for the biggest banks], all things being equal, should receive a higher valuation."
But the analyst wrote that "growth is constrained by regulation at the large banks, which should limit their relative P/E multiple. Overall, we expect the SMID bank premium multiple to be sustained."
OK, so what should long-term investors, who can ride this wave for the next five years, be considering?
Rather than focus on banks currently within the sweet spot of $20 billion to $35 billion in total assets, Cannon listed 14 names that KBW expects to grow sufficiently to be considered "regional and industry champions" over the next five years. The names on this list on average trade for P/TBV of 2.5, for 17.9 times consensus 2014 EPS estimates and 14.5 times consensus 2015 EPS estimates. KBW has neutral "market perform" ratings on half the group, with six rated "outperform" and one rated "underperform."
Here are two fast-growing names included in KBW's list that are already quite familiar to may bank stock investors, and were among the banks showing the best loan growth during the third quarter. Both are rated "market perform" by KBW:
- First Republic Bank (FRC) of San Francisco. The bank had $41 billion in total assets as of Sept. 30, exceeding the ideal range cited by Cannon. The shares trade for 2.4 times tangible book value, for 16.7 times the consensus 2014 EPS estimate of $3.11 and for 15.2 times the consensus 2015 EPS estimate of $3.42. First Republic reported 18% year-over-year growth in average loans. Its ROTCE for the first three quarters of 2013 was 15.77%.
- Signature Bank (SBNY) of New York. The bank had $21 billion in total assets as of Sept. 30. The shares closed at $107.87 Friday and traded for 2.9 times tangible book value, for 20.2 times the consensus 2014 EPS estimate of $5.34, and for 17.8 times the consensus 2015 EPS estimate of $6.07. The bank has made a major push to expand its equipment leasing business and reported 40% year-over-year growth in average commercial loans and leases through the third quarter. Signature Bank's ROTCE for the first three quarters of 2013 was 12.46%.
- City National Corp. (CYN) of Los Angeles.
- FirstMerit (FMER) of AKron, Ohio.
- Prosperity Bancshares of (PB) Houston.
- Texas Capital Bancshares (TCBI) of Dallas.
- Umpqua Holdings (UMPQ) of Portland, Ore.
- BankUnited (BKU) of Miami Lakes, Fla.
- Columbia Banking System (COLB) of Tacoma, Wash.
- East West Bancorp (EWBC) of Pasadena, Calif.
- PacWest Bancorp (PACW) of Los Angeles
- First Financial Holdings (SCBT) of Columbia, S.C.
- SVB Financial Group (SIVB) of Santa Clara, Calif.