NEW YORK (TheStreet) -- The big discount for big bank stocks could be coming to an end.
Stocks of the largest U.S. banks have for years been trading at significantly discounted valuations to book value and forward earnings estimates when compare to regional banks, which is understandable because of the big banks' greater regulatory scrutiny, higher capital requirements and litigation risk.
With the KBW Bank Index sliding 5% so far this year, following stellar gains of 35% in 2013 and 30% in 2012, many sell-side analysts have been upgrading bank stocks, including Fifth Third Bancorp (FITB), and other regional banks, while also highlighting other undervalued regional names, including FirstMerit FMER of Akron, Ohio.
KBW analyst Fred Cannon on Sunday, following last week's market panic, wrote in a client note that "emerging markets sell-offs tend to be buying opportunities for financial stock investors, although getting the timing right is difficult. We believe that the current position of U.S. global financial firms-extremely strong capital positions and overall improving credit-should allow history to repeat itself during the current emerging market sell-off."
The numbers showing slowing manufacturing growth in the United States and China caused a sharp drop in the broad market and in bank stocks on Monday, setting the stage for what could be a volatile reaction to the Department of Labor's January unemployment report on Friday.
Getting back to long-term considerations, Evercore Partners analyst Andrew Marquardt in a note to clients on Thursday wrote, "Large-cap banks are currently trading near peak [price-to-earnings] P/E discount to regional banks with shares at 11.8x [2014 earnings estimates] or a 23% discount which compares to historical closer to 13% (discount peaked in 2011 at over 30%). Importantly, large-cap banks are trading at a ~20% discount to the S&P (modestly less than historical) while regionals are trading at a 3% premium (vs hist 16% discount)."