Here's Which Beaten-Down Banks to Buy

NEW YORK (TheStreet) -- Since reporting first quarter 2014 earnings, the largest banks as well as regionals and non-retail banks have pulled back considerably from their late March early April 52-week highs.

KBW Bank Index (BKX) of 24 of the most widely held U.S. banks has seen an almost 10% decline from its 52-week high of $73.90 set on 3/21/2014. In addition, half the global banks I follow that have a substantial U.S. presence or traded publicly on U.S. exchanges made their highs in May with the other half making their highs in mid-January.

This group of eight global banks has also seen a decline of just over 9% off its one-year highs. Further details on earning season results and stock trading performance can be obtained by viewing the links on the following articles: Trading Bank Earnings Part 1 and Trading Earnings, Part 2 and 'Non-Traditional' Strong Results: Trading Earnings, Part 3.

Why are bank stocks down from their earlier year highs? Is it the slowing U.S. and world economies as exhibited by U.S.GDP growth rate of only 0.1% for the first quarter of 2014, or is it a buying opportunity?

If the latter, keep Citigroup (C), Regions Financial (RF) and Bank of Montreal (BMO) in mind. I explain why below.

In part, banks are an indicator of slowing economic demand since their primary business depends on economic activity via commercial banks loans, investments and the housing market (mortgages). So it is not surprising the banking or financial sector is a good indicator of the overall health of the economy since almost every aspect involves this sector.

Although, stock price performance on this group may be a lagging indicator, several banks have seen their future quarterly and yearly earnings estimates boosted, which may bode well for future stock price performance and anticipated increased economic activity for the second half of 2014.

The charts below of U.S. gross domestic product (GDP) growth rate % and the KBW Banking Index for the last 12 quarters show the correlation between one measure of the U.S. economy and the banking sector of the most popular U.S. banks.

The charts show the percentage price decrease of the banking index in the third quarter of 2011, second quarter of 2012 and in the slow percentage increases in the index for the first quarter of 2013 correlate closely with slowdowns in the U.S. GDP growth rate in those same quarters. The continued decline in the KBW Index for the first quarter of 2014 shows the weakness also correlates to the slowdown in the U.S. economy with a growth rate of only 0.1% (unrevised) and the May 16 change of -6.8% in the KBW may indicate further weakness ahead or a buying opportunity if the economic conditions improve. The second quarter 2014 GDP growth forecasted is expected to be between 3% to 4%.

The table below shows a summary of each group of banks (money centers, "super regionals," non-traditional and global banks) to see how each group has fared in 2014 and identifies the best valued bank in the group and potential buying opportunities.

Based on table above, big money center banks have been hit the hardest with stock price deprecation of 2.5% for the last 5 weeks and almost a 12% decline from their collective 52-week highs. Non-traditional banks such a credit card issuers or investment brokers were next hardest hit from their one-year highs.

Citigroup is the best selection of the money center banks, with a 6% beat of the first quarter, 16% of the 52-week high reached on March 21. Citigroup is expected to enjoy a 54% increase in its one-year stock price target.

Regions Financial is the best bet to appreciate in fiscal-year 2014 with a 31% return after beating first-quarter estimates by 10%. The best non-traditional bank is Goldman Sachs, (GS) beats earnings estimates for three years including an industry best 16% beat in the last quarter and a forecasted return of 53% over the next year.

The global banks are a bit harder to forecast because of currency fluctuations, information available and reliability of the analysts' estimates. Of the group I follow, Bank of Montreal would be the best play of the group. 

At the time of publication the author had positions in Citigroup, Bank of America, Wells Fargo and Banco Santander (SAN) listed above.

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