Banks Rise as Retail Stalls Broad Market

NEW YORK (TheStreet) -- SunTrust (STI) of Atlanta led big regional banks higher on Thursday, with shares rising 2% to close at $38.01.

The broad indices ended mixed, with some retail stocks seeing large declines just ahead of earnings season, on fears of weak holiday sales.

The KBW Bank Index (I:BKX) rose 0.7% to 71.02, with all but four of the 24 index components ending with gains.

Early on Thursday the European Central Bank and the Bank of England both announced they would leave their key interest rates unchanged at record low levels.

The Department of Labor said initial unemployment claims for the week ended Jan. 4 totaled 330,000, declining by 15,000 from 345,000 the previous week. The figure for the previous week was adjusted upward from 339,000.  For the week ended Jan. 4, economists polled by Reuters on average had estimated jobless claims would come in at 333,000.  The four-week average for initial unemployment claims declined to 349,000, declining by 9,750 from the previous week's revised average of 358,750.

"Parsing out the volatility, the trend appears relatively stable with claims hovering in a tight range between 330-345k, a vast improvement from an average of 370-375k in 2012. Once clean data reappears, we would hope a declining rather than stagnant trend reappears, signaling continued improvement rather than status quo in the labor market," Sterne Agee chief economist Lindsey Piegza wrote in a note to clients.

Investors now are focused on the Labor Department's month unemployment figures, which come out Friday morning.  Economists expect the unemployment rate for December to hold steady from November, when the rate dropped significantly to 7.0% from 7.3% in October.

Investors and the media during 2013 were fixated about the Federal Reserve's expected tapering of monthly purchases of long-term bonds, which the Federal Open Market Committee in December said would be lowered to $75 billion from $85 billion.  Long-term interest rates rose accordingly.

But the Fed's main policy tool is the short-term federal funds rate, which has remained in a target range of zero to to 0.25% since late 2008. The FOMC has said repeatedly it would be unlikely to change this "highly accommodative" policy at least until the unemployment rate falls below 6.5%.

While much of the pressure on banks' net interest margins has subsided, most banks need to see a parallel rise in interest rates before they will see a significant rise in net interest income -- making the unemployment rate a critical measure for the banks.

SunTrust

Shares of SunTrust returned 31% during 2013.  The shares trade for 1.5 times tangible book value, according to Thomson Reuters Bank Insight, and for 11.6 times the consensus 2015 earnings estimate of $3.27.  The consensus 2014 EPS estimate is $2.96.

BMO Capital Markets analysts Lana Chan and Peter Winter on Tuesday upgraded SunTrust to an "outperform" rating from "market perform," and raised their price target for the shares to $42 from $40.00. 

"Key catalysts" for the bank over the next 12 months include faster loan growth, "driven by better CRE growth and stronger consumer loan production," expense reduction, "the ability to become more asset sensitive with $16 billion in interest rate swaps rolling off," and a greater deployment of excess capital, the analysts wrote in a note to clients.

The Federal Reserve will conduct its next round of annual stress tests for the largest U.S. financial firms in March, with the regulator immediately following up with a review of the group's capital deployment plans.

BMO estimates SunTrust's total capital return, including dividends and share buybacks, to increase "from 26% [of earnings] in 2013 to 47% in 2014 (including a dividend payout of close to 30%)."

BMO estimates SunTrust will earn $3.00 a share this year, with EPS rising to $3.35 during 2014.

The following chart shows the performance of SunTrust's stock against the KBW Bank Index and the S&P 500 since the end of 2011: 


STI 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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