10 Bank Stocks You Need to Watch During Earnings Season (Update 1)
>Updated with Monday comments on JPMorgan Chase from Credit Suisse analyst Moshe Orenbuch.
NEW YORK (TheStreet) -- It was a rocky second quarter for bank stocks, following what seems to have become an annual pattern for the sector.
The KBW Bank Index
In addition to weak investment banking and trading results, following a decent first quarter, there are several other major themes for the industry, heading into second-quarter earnings season:
Banks with mortgage lending operations will report another strong quarter for loan originations and income from quick loan sales to Fannie Mae
Sterne Agee analyst Todd Hagerman said on Friday that while he expects banks to report another strong quarter for mortgage loan originations, he expects mortgage revenue "to retreat somewhat" from the first quarter, because of last quarter's strong gains-on-sale. The analyst "also expects "diminished results from mortgage hedge gains will also likely be a drag on mortgage banking results given the relatively flat yield curve."
Fannie and Freddie Putback Demands
With Fannie Mae and Freddie Mac showing increased aggressiveness in demanding that mortgage loan sellers and servicers repurchase nonperforming loans, some of the major industry players are beefing up their repurchase reserves, including First Horizon National
PNC Financial Services Group
Industry observers will also be looking for clues from Bank of America
With short term rates remaining near zero and long term rates declining, there's a limit on most banks' benefits from declining funding costs, and deployment of increased liquidity into lower-yielding securities and loans is squeezing bank profits. Hagerman said his firm saw "interest margins falling by about 5bps, on balance, for our coverage universe," and that although "the q/q decline remains manageable in the near term (particularly with improved balance sheet growth expectations), commentary surrounding
Basel III and Trust Preferred Redemptions
With regulators' new capital requirements -- based mainly on the Basel III requirements -- excluding most trust preferred securities from Tier 1 capital, many banks are now redeeming their trust preferreds at par value -- despite the sharp decline in interest rates since the trust preferred paper was issued -- because the securities' indentures allow redemptions at par under these circumstances. This will have the effect of mitigating some of the margin pressures, while, of course, forcing yield-hungry investors to scramble for new investments.
Just last week, PNC announced plans to redeem roughly $968 million in trust preferred shares, some of which had been originally issued by National City Corp., which was acquired by PNC at the end of 2008. Also last week, U.S. Bancorp
A quick look at share valuations shows that investors continue to shy away from the nation's largest banks:
- Shares of JPMorgan Chase
closed at $35.73 Friday, returning 9% year-to-date, following a 20% decline during 2011. The shares trade just above their reported March 31 tangible book value of $34.91, and for less than seven times the consensus 2013 EPS estimate of $5.31. The company is set to report its second-quarter results before the market opens on July 13, with analysts expecting an 83-cent profit, declining from EPS of $1.31 the previous quarter and $1.27 a year earlier. The consensus EPS estimate for all of 2012 is $4.33. The big mystery for JPMorgan is just how much of a second quarter loss the company will show, after CEO James Dimon disclosed a hedge trading loss by its Chief investment Office (CIO) estimated at "slightly more than $2 billion." Dimon said that as the company wound down the hedge trading positions, the losses might climb higher, and the New York Times reported last week that cumulative losses from the trades could eventually total as much as $9 billion.
- Bank of America closed at $8.18 Friday, returning 48% year-to-date, after dropping 58% last year. Even with this year's recovery, the shares trade for just 0.6 times their reported March 31 tangible book value of $12.87, and for eight times the consensus 2013 EPS estimate of 98 cents. The company will report its second-quarter results on July 18, with analysts expecting earnings of 16 cents a share. The consensus EPS estimate for all of 2012 is 57 cents.
- Shares of Citigroup
closed at $27.41 Friday, returning 4% year-to-date Thursday, following a 44% decline during 2011. The shares trade for just over half their reported March 31 tangible book value of $50.90, and six times the consensus 2013 EPS estimate of $4.54. Citi will report its second-quarter results on July 20, with analysts expecting earnings of 89 cents a share. The consensus EPS estimate for all of 2012 is $3.93.
Credit Suisse analyst Moshe Orenbuch said on Monday that for JPMorgan Chase, his firm has "embedded a ~$4Bn pre-tax CIO loss offset with $1Bn of securities gains--for a roughly ~$3Bn net pre-tax loss ($0.50/shr)."
Credit Suisse estimates that JPMorgan will report second-quarter earnings of 68 cents a share. Orenbuch said that the company's "formal presentation by management" on July 13 and that "given plans to provide incremental details regarding the trades provides us with some optimism that losses have been contained and the portfolio has been largely neutralized."
Orenbuch said that "absent the CIO loss, we expect JPMorgan to post the strongest quarter among the money center banks and we favor JPM heading into the earnings report." The analyst rates JPMorgan "Outperform," with a $50 price target.
In contrast to the rest of the "big four," shares of Wells Fargo
The following are earnings previews for the other 10 components of the KBW Bank Index trading below 10 times forward earnings estimates, as of Friday's market close, in descending order by forward P/E ratio:
10. State Street
Shares of State Street
Based on a 24-cent quarterly payout, the shares have a dividend yield of 2.15%.
The shares trade for 1.9 times tangible book value, according to Thomson Reuters Bank Insight, and for just under 10 times the consensus 2013 Earnings estimate of $4.49 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $3.90.
The company in March authorized $1.8 billion in share repurchases, through the first quarter of 2013.
CEO Joseph Hooley in April estimated that the company would "achieve approximately $94 million in annual pre-tax, run-rate expense savings in 2012" from its "business operations and information technology transformation program."
State Street will announce its second-quarter results on July 17, with the consensus among analysts being a profit of 98 cents a share, improving from EPS of 84 cents during the first quarter, and 96 cents during the second quarter of 2011.
KBW analyst Robert Lee rates State Street "Outperform," with a price target of $53, saying on Wednesday that the stock "remains attractively valued," and that "the robust share repurchases and efficiency initiatives should provide some support to earnings in 2012 and into 2013," adding that "new business trends remain positive."
KBW expects State Street to post second-quarter earnings of a dollar a share, while estimating EPS of $3.85 for all of 2012, and $4.50 in 2013.
Interested in more on State Street? See TheStreet Ratings' report card for this stock.
9. Huntington Bancshares
Based on a four-cent quarterly payout, the shares have a dividend yield of 2.50%.
The shares trade for 1.2 times tangible book value, and for 9.7 times the consensus 2013 EPS estimate of 66 cents. The consensus 2012 EPS estimate is 64 cents.
The company plans to repurchase up to $182 million in common shares through the first quarter of 2013.
Huntington will report its second-quarter results on July 19, with a consensus EPS estimate of 15 cents, declining from 17 cents in the first quarter, and 16 cents during the second quarter of 2011.
Deutsche Bank analyst Matt O'Connor rates Huntington a "Hold," saying on Friday that his firm's second-quarter EPS estimate is in line with the consensus and assumes "5m shares (0.6% of outstanding) are repurchased in 2Q." O'Connor also said that Huntington's $80 million in second-quarter trust preferred redemptions should result in a gain of less than a penny a share, but will boost the net interest margin by one to two basis points per full quarter.
Deutsche Bank expects "average loan growth (including loans held for sale) of 4.3% (2.0% ex deals completed late 1Q), with growth in C&I, auto, residential mortgage and home equity and lower commercial real estate," and for a "seasonal increase in service charge revenue to be mostly offset by lower mortgage banking (we estimate down 8% un-annualized on a reported basis but +10% ex MSR hedge gains which were +$7.6m in 1Q and we estimate zero in 2Q)."
The bottom line for second-quarter noninterest income is an expected decline of $34 million, or 12%, "given the special items noted above."
Interested in more on Huntington Bancshares? See TheStreet Ratings' report card for this stock.
Shares of KeyCorp
Based on a quarterly payout of five cents, the shares have a dividend yield of 2.58%.
The shares trade for 0.9 times tangible book value, and for 9.6 times the consensus 2013 EPS estimate of 81 cents. The consensus 2012 EPS estimate is 77 cents.
The company during the first quarter authorized up to $344 million in share repurchases, beginning in the second quarter.
KeyCorp will report its second-quarter results on July 19, with a consensus estimate of 19 cents a share, declining from EPS 20 cents the previous quarter and 25 cents a year earlier, when the company transferred $8 million from loan loss reserves, rather than simply allowing them to decline in the improving credit environment.
The company stands out as being one of the few among large-cap industry players that analysts see being well-positioned for an increase in its net interest margin over coming quarters.
UBS analyst Stephen Scinicariello rates KeyCorp a "Buy" with a $10 price target, matching the second-quarter consensus EPS estimate, while estimating the company will earn 83 cents a share for all of 2012 and 95 cents a share in 2013. The analyst said on June 25 that "KEY has opportunities to increase its
The analyst expects "$127.5MM of buybacks this quarter."
Interested in more on KeyCorp? See TheStreet Ratings' report card for this stock.
Shares of SunTrust
The shares trade just above tangible book value, and for 9.1 times the consensus 2013 EPS estimate of $2.65. The consensus 2012 EPS estimate is $1.91.
SunTrust will report its second-quarter results on July 20, with analysts expecting a 43-cent profit, compared to EPS of 46 cents in the first quarter and 33 cents in the second quarter of 2011.
Jefferies analyst Ken Usdin rates SunTrust a "Buy," with a $28 price target, saying on Wednesday that "Investors remain focused on credit-related expenses, especially following mortgage repurchase preannouncements" from First Horizon and PNC. Usdin expects "continued directional improvement, but do not believe the magnitude of the decline
Usdin added that "the other big issue is that large swap maturities will remove $35mm of net interest income this quarter," although "we believe investors are up to speed on the swap roll-off, which should minimize the risk of sticker shock from the 10bp impact it will have on STI's net interest margin."
Jefferies estimates that SunTrust will post second-quarter earnings of 42 cents a share, with EPS of $1.80 for all of 2012 and $2.65 in 2013.
Interested in more on SunTrust? See TheStreet Ratings' report card for this stock.
6. PNC Financial Services Group
Shares of PNC closed at $61.11 Friday, returning 7% year-to-date, following last year's 3% decline.
Based on a quarterly payout of 40 cents, the shares have a dividend yield of 2.62%.
The shares trade for 1.3 times tangible book value, and for nine times the consensus 2013 EPs estimate of $6.81. The consensus 2012 EPS estimate is $5.94.
The company said in April that it planned "to purchase up to $250 million of common stock under its existing 25 million share repurchase program in open market or privately negotiated transactions during the remainder of 2012."
PNC will announce its second-quarter results on July 18, with analysts expecting EPS of $1.26, declining from $1.44 in the first quarter, and $1.67 a year earlier. As mentioned above, the second-quarter results will reflect the addition of $350 million to the company's mortgage repurchase reserves.
Sterne Agee analyst Todd Hagerman rates PNC a "Buy," with a $74 price target, and said on Friday that "the loan growth outlook in 2012 remains positive, as PNC continues to gain market share, with new clients exhibiting higher loan utilization rates vs. legacy customers," adding that "accretion stemming from
Sterne Agee expects PNC to post second-quarter earnings of $1.20 a share, and estimates EPS of $6.28 for all of 2012, followed by 2013 EPs of $6.90.
Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.
5. First Niagara Financial Group
Shares of First Niagara Financial Group
Based on a quarterly payout of eight cents, the shares have a dividend yield of 4.18%.
The shares trade just below tangible book value, and for 8.9 times the consensus 2013 EPS estimate of 86 cents. The consensus 2012 EPS estimate is 76 cents.
The company on Wednesday announced that it had "taken steps to reposition its securities portfolio through the sale of $3.1 billion of mortgage-backed securities (MBS), the proceeds of which were used to repay a comparable amount of short-term debt." First Niagara also said that there were no prepayment penalties on the debt repayments, and that the company would "recognize a $16 million pre-tax gain from the sale of securities in the second quarter of 2012."
Analysts expect First Niagara to report second-quarter operating earnings of 18 cents a share, compared to operating earnings of 19 cents a share in the first quarter, and 24 cents in the second quarter of 2011.
Jefferies analyst Casey Haire on Thursday said Haire on Thursday reiterated his "Buy" rating for First Niagara, while lowering his 12-month price target for the shares by two dollars to $9.50, lowering his second-quarter EPS estimate by three cents to 18 cents. The analyst also reduced his 2012 EPS estimate to 76 cents from 90 cents and his 2013 estimate to 85 cents from $1.03.
Taking the long view, the analyst said that the "restructuring gives up some earnings power, but also reduces premium amortization risk and provides much-needed clarity to earnings stream, which should win the stock back some multiple." The added "clarity/predictability of the EPS forecast could be the catalyst for long-awaited multiple expansion. Applying a discounted P/E multiple (11x vs. 12x peer avg.) and factoring in a 4% dividend yield, puts upside at over 20% from here," according to Haire.
Interested in more on First Niagara Financial Services Group? See TheStreet Ratings' report card for this stock.
4. Bank of New York Mellon
Shares of Bank of New York Mellon
Based on a quarterly payout of 13 cents, the shares have a dividend yield of 2.37%.
The shares trade for 2.2 times tangible book value, and for 8.9 times the consensus 2013 EPS estimate of $2.47. The consensus 2012 EPS estimate is $2.21.
The company plans to repurchase up to $1.16 billion in common shares this year, and reported buying back "17.3 million common shares in the open market at an average price of $21.53 per share for a total of $371 million," during the first quarter.
Analysts expect Bank of New York Mellon to report second-quarter earnings of 54 cents a share, improving from 52 cents the previous quarter, but declining from 59 cents a year earlier.
KBW analyst Robert Lee rates Bank of New York Mellon "Market Perform," with a $26 price target, saying on Wednesday that "to some extent BK may be the most levered of the
KBW estimates that Bank of New York Mellon will report second-quarter earnings of 51 cents, with EPS estimate of $2.15 for all of 2012, and $2.45 in 2013.
Interested in more on Bank of New York Mellon? See TheStreet Ratings' report card for this stock.
3. Fifth Third Bancorp
Shares of Fifth Third Bancorp
Based on a quarterly payout of eight cents, the shares have a dividend yield of 2.39%.
The shares trade for 1.2 times tangible book value, and for 8.9 times the consensus 2013 EPS estimate of $1.51. The consensus 2012 EPS estimate is $1.49.
Fifth Third will announce its second-quarter results on July 19, with the consensus estimate among analysts being a 35-cent profit, declining from 45 cents the previous quarter and matching the company's results during the second quarter of 2011.
UBS analyst Stephen Scinicariello rates Fifth Third a "Buy," with a with a $16 price target, and said on June 25 that during the first quarter, Fifth Third's "run rates for fee income and expenses improved and it will be important for FITB to maintain these levels." Fifth Third's guidance calls for expenses to decline by $15 million during the second quarter from $973 million last quarter while UBS models "a $7MM reduction to $965.6MM."
The analyst expects Fifth Third's net interest margin to "decline by 8bps this quarter to 3.53% (slightly worse than the 5-6bps guided to) and would anticipate some improvement in forward guidance due to trust preferred redemptions (>$1.4B in 2012)."
Scinicariello also expects "loan growth (1.5% sequentially)" and said that "improved guidance on this front" from KeyCorp's management "could be a key driver for the stock.
UBS estimates that Fifth Third will report second-quarter operating earnings of 36 cents a share, with a full-year operating EPS estimate of $1.51 followed by operating EPS of $1.63 in 2013.
Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.
2. Regions Financial
Shares of Regions Financial
The shares trade for 1.1 times tangible book value, and for 8.8 times the consensus 2013 EPS estimate of 77 cents. The consensus 2012 EPS estimate is 60 cents.
After selling its Morgan Keegan brokerage subsidiary and completing a $900 million common share offering during the first quarter, Regions in early April repaid $3.5 billion in government bailout funds received during 2008 through the Troubled Assets Relief Program, or TARP.
Regions will report its second-quarter results on July 24, with analysts expecting a 14-cent profit, matching the company's first-quarter results. During the second quarter of 2011, the company earned four cents a share.
Deutsche Bank analyst Matt O'Connor rates Regions a "Hold," and said on Thursday that his firm expects Regions "to report 2Q12 EPS of $0.16 (ex a $0.05 charge related to the repayment of TARP)," and that although the company's management "still expects improvement in
Jefferies analyst Ken Usdin also has a "Hold" rating on Regions, with a $7.50 price target, estimating the company will report second-quarter earnings of 17 cents, with full-year EPS estimates of 70 cents for 2012 and 85 cents for 2013. Usdin said on Wednesday that "we believe RF can beat, as consensus looks too conservative in its loan loss provision forecast," and that "while last quarter's reserve release magnitude ($215mm) is likely unsustainable, net release should continue with RF's loan loss reserve still high at 3.4% of loans."
Usdin added that net interest income for the second quarter "could disappoint, as earning assets could be down by $1B+ and margin expansion might not emerge until the back half of the year," but also said that "even with flat net interest income, pre-provision earnings should grow
1. Capital One Financial
Shares of Capital One Financial
The shares trade for 1.4 times tangible book value, and for eight times the consensus 2013 EPS estimate of $6.85. The consensus 2012 EPS estimate is $6.51.
Capital One will report its second-quarter results on July 19, with analysts expecting earnings of $1.35 a share, including one-time items springing from the company's purchase of HSBC's U.S. credit card portfolio in May. The company earned $2.72 a share during the first quarter -- including a bargain purchase gain of $1.16 a share from its February purchase of ING Direct -- and $1.97 a share during the second quarter of 2011.
Oppenheimer analyst Christ Kotowski rates Capital One "Outperform," with a $62 price target estimating the company will report second-quarter earnings of $1.21 a share, with full year EPS estimates of $7.77 for 2012 and $6.61 for 2003. Kotowski said on June 24 that he expects second-quarter results to be "messy and difficult to interpret because this quarter will include the HSBC acquisition and a full quarter of the ING Direct acquisitions."
The analyst said "we have made the decision to model the legacy COF business and the ING Direct impact, but we have excluded the HSBC acquisition from our number," adding that "in 1Q12 the company provided enough details in the press release to track the apples-to-apples changes, and we suspect this quarter will be no different."
Interested in more on Capital One Financial? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.
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