California Banks Are Sitting Pretty, Says KBW

NEW YORK (TheStreet) -- Stocks of California community banks in urban areas trade at premium valuations, but the group is well-positioned to outperform banks in other areas of the country, according to KBW analyst Julianna Balicka.

"Many of the publicly traded California banks are market leaders in their niches, sectors or local footprints. Therefore, we would be overweight metropolitan California banks as a group in the coming year, and would feel comfortable with most choices as sound stock picks," Balicka wrote in a note to clients Tuesday.

Out of nine California community banks rated "outperform" by KBW, the "best idea for 2014," according to Balicka, is PacWest Bancorp (PACW) of Los Angeles. Balicka's price target for the shares is $49, implying upside of 9% from Wednesday's closing price of $44.85.

PacWest's shares trade for 15.2 times the consensus 2015 earnings estimate of $2.96 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $2.47. Based on a quarterly payout of 25 cents, PacWest's shares have a dividend yield of 2.23%.

Balicka estimated the bank will earn $2.45 a share this year, but is out in front of the consensus estimating EPS will grow to $3.20 in 2015.

PacWest had $6.5 billion in total assets as of Dec. 31, and has a deal in place to acquire its Los Angeles competitor Capital Source (CSE) for about $2.3 billion in stock and cash. Capital Source had $8.9 billion in total assets as of Dec. 31. The deal is expected to be completed before the end of the first quarter. "We believe that the long‐term impact to earnings from the CSE [merge of equals] will be significant. The deal was well received at announcement, but we believe there is more upside after integration, as the earnings power of the Combined Company gains traction," Balicka wrote.

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