NEW YORK (TheStreet) -- Over the next year, continued commercial loan growth and expense reduction will be key for large regional banks to growth their revenues. Boiling down first-quarter financial results for banks in his firm's coverage universe, Jefferies analyst Ken Usdin named three large banks in his firm's coverage universe that are "best-positioned" to grow pre-provision net revenue over the next year, with three others facing a "tougher fight." Bank earnings are, of course, continually distorted by a seemingly ever-growing list of one-time items, and at this point in the credit cycle, most large banks are releasing loan loss reserves, by making quarterly provisions for loan loss reserves that total less than their loan charge-offs. This is why it pays to focus on pre-provision net revenue, which nets the one-time items and provisions for loan losses from gross revenue, less expenses. Usdin said that Jefferies "wanted to re-check our pre-provision net revenue (PPNR) starting points, assumptions for net interest income (NII), fees, and expenses, and overall PPNR trajectories across our large/mid-cap regional universe."
Many banks will have a tough time growing their mortgage revenue from first-quarter levels, which saw many large players, including Wells Fargo, Citigroup, BB&T, Fifth Third Bancorp, M&T Bank, U.S. Bancorp, New York Community Bancorp, PNC Financial Services Group and Huntington Bancshares, post very strong mortgage volume, amid a wave of residential refinancing activity.
Usdin said that "with refi volume expected to fade and gain-on-sale margins near all-time highs, banks could see 30%-40% downward resets in mortgage banking fees in coming quarters. This amounts to a couple percentage points of fee growth, which raises the bar for consumer and corporate banking fees to fill the void."
The analyst also said that net interest margins -- the difference between banks' average yields on loans and investments and their average costs for deposits and wholesale borrowings -- continued "to impress" with their resilience, but "funding costs will likely bottom in late '12/early '13 (average deposit costs are already 50bp)."
Usdin looks for most regionals to continue to "grow loans in the mid single-digit range, helping keep overall net interest income flat-to-up-slightly," with non-real estate commercial and industrial loans being "the primary driver, as we believe current growth rates (low double-digits Y-Y) are sustainable."
The analyst added that "expense management is becoming more of a necessity given ongoing revenue pressure throughout the industry," and that although "specifically quantified cost save programs should be less common, 'continuous improvement' initiatives should keep expenses relatively stable."
The following are the three large regional banks that Usdin sees as best-positioned to grow their pre-provision revenues over first-quarter levels over the next year, followed by the three facing a "tougher fight." Please note that Jefferies' stock recommendations are not all "Buys" for the first group, and there are two "Buy" recommendations among the second group: Regions Financial Shares of Regions Financial of Birmingham, Ala., closed at $6.56 Wednesday, returning 53% year-to-date, following a 38% decline during 2011.
The shares trade for just above tangible book value, according to Thomson Reuters Bank insight, and for eight times the consensus 2013 earnings estimate of 78 cents a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 59 cents.
Regions in early April repaid $3.5 billion in federal bailout funds received through the Troubled Assets Relief Program, or TARP. Then on May 2, the company announced it had fully exited TARP by repurchasing a warrant from the U.S. Treasury for $45 million.
Usdin said that the bank's "Pre-provision earnings should grow throughout the year as seasonal first-quarter employee compensation expenses ($40mm-$50mm) dissipate and the net interest margin starts to expand," adding that "the potential for loan balances to bottom could also serve as a catalyst, especially if commercial real estate stabilizes sooner-than-expected."
Usdin also said that "all things considered, RF has one of the best pre-provision outlooks in our universe, with mortgage banking fees the largest headwind."
The analyst warned that "the one area we could be overly ambitious is expenses," as Jefferies has assumed that "most of the increase was seasonal and has modeled expenses down considerably in 2Q. If this assumption is wrong, our 2012 expense estimate could be off by north of $100mm, with the potential for even greater carry through in 2013."
Jefferies estimates that Regions Financial's core pre-provision net revenue for all of 2012 will total $1.95 billion, growing 4% to $2.06 billion in 2013.
Usdin has a "Hold" rating on Regions, with a $7.50 price target, and estimates the company will earn 75 cents a share this year, followed by 2013 EPS of 85 cents.
Interested in more on Regions Financial? See TheStreet Ratings' report card for this stock.SunTrust Shares of SunTrust of Atlanta closed at $23.08 Wednesday, returning 31% year-to-date, following a 40% drop during 2011.
The shares trade for just under their tangible book value, and for nine times the consensus 2013 EPS estimate of $2.66. The consensus 2012 EPS estimate is $1.90.
Usdin said that for SunTrust, "lower environmental expenses including credit, collections and maintenance costs on repossessed real estate provide a path to pre-provision earnings growth, but it might not necessarily be a straight line."
"Environmental expenses have ranged anywhere from $200mm - $500mm in recent quarters with the timing of mortgage repurchase requests and repossessed real estate marks remaining volatile, said Usdin, who added that "these expenses should run closer to $150mm over time." The analyst also said that aside from the environmental costs, "STI's earnings growth profile is similar to peers: net interest income growth is challenged, fees face tough comparisons with first-quarter results, and expenses will be tightly managed (STI plans to remove $300mm of costs by 2013)."
Jefferies estimates that SunTrust's 2012 core pre-provision net revenue of $2.61 billion will grow by 20% to $3.14 billion in 2013.
Usdin rates SunTrust a "Buy," with a $27 price target, estimating the company will earn $1.70 a share this year followed by EPS of $2.65 in 2013.
Interested in more on SunTrust? See TheStreet Ratings' report card for this stock.Huntington Bancshares Huntington Bancshares of Columbus, Ohio, has seen its stock return 18%year-to-date, through Wednesday's close at $6.42, following a 19% decline during 2011. Based on a four-cent quarterly payout, the shares have a dividend yield of 2.49%.
The shares trade for 1.3 times tangible book value, and for 9.5 times the consensus 2013 EPS estimate of 67 cents. The consensus 2012 EPS estimate is 63 cents.
Usdin said that "over the past two years, Huntington has invested heavily in its core businesses with a focus on improving longer-term profitability,: and that although "some of these investments have been slower to season given the tough economic and interest rate environment," he has been "encouraged by progress in recent quarters, particularly the stability of core expenses."
Revenue drivers for Huntington include "strong organic loan production," along with "the $1B boost to average earning assets in 2Q from acquisitions in late-1Q," and a relatively stable net interest margin, according to Usdin, who expects "positive operating leverage to emerge in the back half of '12, and core PPNR growth should outperform peers."
Jefferies estimates that Huntington's total core pre-provision revenue will total $942 million during 2012, growing by 7% to $1.01 billion in 2013.
Usdin rates Huntington Bancshares a "Buy," with a price target of $7.50, and estimates the company will earn 65 cents a share this year, followed by EPS of 66 cents during 2013.
Interested in more on Huntington Bancshares? See TheStreet Ratings' report card for this stock.BB&T Shares of BB&T of Winston-Salem, N.C.., closed at 31.23 Wednesday, returning 26% year-to-date, following a 2% decline last year. Based on a quarterly payout of 20 cents, the shares have a dividend yield of 2.56%.
The shares trade for twice their tangible book value, and for ten times the consensus 2013 EPS estimate of $3.01. The consensus 2012 EPS estimate is $2.68.
Usdin said that "a more cautious net interest margin outlook is the main reason BBT will be challenged to grow pre-provision earnings next year," with particular "uncertainty about where BBT's margin will shake out once Colonial-related purchase accounting runs out." BB&T purchased the failed Colonial Bank of Montgomery, Ala., from the Federal Deposit Insurance Corp. in August 2009.
The analyst also said that "the first quarter marked a turning point" for BB&T's insurance business, "posting 5%+ year-over-year fee growth," and that "BBT also has an unspecified efficiency program that could result in better-than-expected operating leverage."
Jefferies estimates that BB&T's 2012 core pre-provision net revenue will total $4.34 billion, declining by 5% to $4.11 billion in 2013.
Usdin has a "Hold" rating on BB&T, with a price target of $33, estimating the company will earn $2.75 a share this year, followed by 2013 EPS of $2.97.
Interested in more on BB&T? See TheStreet Ratings' report card for this stock.PNC Financial Services Group Shares of PNC Financial Services Group of Pittsburgh closed at 64.63 Wednesday, returning 13% year-to-date, following last year's 3% decline. Based on a 40-cent quarterly payout, he shares have a dividend yield of 2.48%.
The shares trade for 1.4 times tangible book value, and for nine times the consensus 2013 EPS estimate of $6.89. The consensus 2012 EPS estimate is $6.20.
Usdin said that PNC's "full-year guidance implies a quarterly pre-provision run-rate of $1,475mm for the remainder of the year," and that although "this is a step-down from 1Q levels, year-over-year growth still looks favorable." The analyst added that comparisons "become tougher in 2013, primarily from purchase accounting accretion run-off (we model a $500mm decline)," which creates a "higher burden to perform on the RBC Bank (USA) acquisition and to keep legacy PNC expenses tightly controlled."
Based on its own analysis and PNC's guidance, Jefferies estimates that the company's 2012 core pre-provision net revenue will total $6.14 billion, declining 3% in 2012, to $5.96 billion.
Usdin rates PNC a "Buy," with a $72 price target, estimating the company will earn $5.93 a share this year, followed by 2013 EPS of $6.60.
Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.Fifth Third Bancorp Shares of Fifth Third Bancorp of Cincinnati closed at $13.99 Wednesday, returning 11% year-to-date, following an 11% decline during 2011. Based on a quarterly dividend of eight cents, the shares have a yield of 2.29%.
Fifth Third's shares trade for 1.3 times tangible book value, and for nine times the consensus 2013 EPS estimate of $1.51. The consensus 2012 EPS estimate is $1.48.
Usdin said that he expects Fifth Third's "pre-provision earnings to be pressured in the back half of 2012 before stabilizing in 2013, with touch comparisons to very strong first-quarter mortgage revenue "and net interest margin compression being the main obstacles to growth.
The analyst added that "loan growth should eventually power through, but the overall impact will be negligible until asset yields start to stabilize," which "leaves a burden on general belt tightening, as FITB will be hard pressed to approach its 60% efficiency target otherwise."
A bank's efficiency ratio is, essentially, the number of pennies of expenses it incurs, for each dollar of revenue. The lower the efficiency ratio the better, and Fifth Third reported a first-quarter efficiency ratio of 58.3%, improving from 67.5% the previous quarter and 62.5% a year earlier.
Jefferies estimates that Fifth Third's 2012 core pre-provision net revenue will total $2.27 billion, increasing by 2% to $2.31 billion in 2013.
Usdin rates Fifth Third a "Buy," with a $16 price target, and estimates the company will earn $1.45 a share this year and also in 2013.
Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.
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