This may come as a surprise to some investors, because the largest U.S. banks have been trading for years at significantly lower valuations than large regional banks and most publicly traded community banks.
Here are two examples:
Shares of JPMorgan Chase (JPM) closed at $58.21 Thursday and traded for 9.2 times the consensus 2015 earnings estimate of $6.33, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $6.36. The consensus 2014 EPS estimate is $5.99.
Citigroup (C) is cheaper than JPMorgan on the same basis, closing at $52.27 Thursday and trading for 8.8 times the consensus 2015 EPS estimate of $5.95. The consensus 2014 EPS estimate for Citigroup is $5.32.
We're using 2015 EPS estimates for price-to-earnings ratios, since sell-side analysts have "turned the page" to go another year out.
While shares both JPMorgan and Citigroup fared quite well during an excellent 2013 for bank stocks and for the broad market, their relatively low valuations reflect the regulatory target on JPMorgan's back, and Citigroup's relatively weak earnings as it continues its transformation, with the wind-down of Citi Holdings.
But HomeStreet is the cheapest of all publicly traded U.S. banks for which consensus EPS estimates are available. The shares closed at $20.16 Thursday and traded for just 6.2 times the consensus 2015 EPS estimate of $3.25. Analysts are expecting a major increase in earnings from the 2014 consensus EPS estimate of $2.39.
HomeStreet's shares sank by 20% during 2013, which is a very bad performance when you consider the 35% return for the KBW Bank Index (I:BKX). That may not be a fair comparison, since the KBW Bank Index mainly includes large-cap bank stocks, but it illustrates just how bad 2013 was for HomeStreet's stock.
The weakness in HomeStreet's shares reflected the reduced expectations for mortgage lending revenue, as rising long-term interest rates slowed the wave of mortgage refinancing activity in the United States. The Mortgage Bankers Association estimates that originations of one-to-four family mortgage loans declined by 14% during 2013, to $1.755 trillion. According to the MBA's latest forecast, originations will drop by another 33% to $1.174 trillion during 2014, before rebounding by 5% to $1.229 trillion in 2015.
In addition to lower volume, the rising long-term interest rates have also lowered the gain-on-sale margins for newly originated mortgage loans.
HomeStreet had $2.9 billion in total assets as of Sept. 30, with operations mainly in the Pacific Northwest and Hawaii. The company earned $1.7 million, or 11 cents a share, during the third quarter, declining from $12.1 million, or 82 cents a share, in the second quarter, and $22.0 million, or $1.50 a share, during the third quarter of 2012.
The main factor in the lowering of earnings was a decline in gains on the sale of newly originated mortgage loans to $33.5 million in the third quarter from $52.4 million the previous quarter and $68.9 million a year earlier.
On a brighter note, HomeStreet's net interest income grew to $20.4 million during the third quarter from $17.4 million the previous quarter an $16.6 million a year earlier, as the company's balance sheet grew and its net interest margin improved. The margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- widened to a tax adjusted 3.41% in the third quarter, from 3.10% in the second quarter and 3.12% during the third quarter of 2012.
Another factor in the earnings decline was HomeStreet's continued expansion, which led to an increase in noninterest expenses to $58.2 million during the third quarter, from $56.7 million the previous quarter and $45.9 million a year earlier.
Despite the difficult outlook for mortgage loan originators, both sell-side analysts covering HomeStreet rate the shares a "buy."
FBR analyst Paul Miller in a note to clients on Dec. 5 wrote, "we remain positive on the shares and believe a current valuation just above existing [tangible book value] of $18.57 provides meaningful upside opportunity."
Miller's note followed a presentation by HomeStreet at an FBR conference, where HomeStreet projected that gain-on-sale margins would stabilize following the fourth quarter of 2013. HomeStreet also said most of its expansion was in new markets in California.
HomeStreet on Nov. 1 completed two small acquisiitnos the acquisitions of Fortune Bank of Seattle and Yakima Bank of Yakima, Wash.
HomeStreet is seeking to grow its commercial lending business to provide about 40% of its revenue within the next few years, with the split between mortgage and commercial eventually being equal.
In a previous note in October following HomeStreet's announcement of its third-quarter results, Miller wrote, "Overall, we believe that if HomeStreet can build its balance sheet, successfully diversify its revenue stream, and maintain strong returns, shares should garner a higher multiple from investors."
The following chart shows the performance of HomeStreet's stock over the past 12 months, against the KBW Bank Index:
Interested in more on HomeStreet? See TheStreet Ratings' report card for this stock.