Citigroup and BB&T: Bernanke's Money Printing Winners & Losers
Citigroup was the winner among the largest U.S. financial names on Wednesday, with shares rising nearly 1.5 percent to close at $37.53.
The broad indexes ended mixed after the Federal Reserve Open Market Committee (FOMC) announced that after central bank's current program of purchasing $45 billion in long-term U.S. Treasury securities each month while selling an equivalent amount of short-term Treasurys is completed at the end of the year, it will continue the purchases "initially at a pace of $45 billion per month." There was no mention of the sale of short-term Treasury paper, and the Fed said that it would continue its purchases of mortgage-backed securities at the pace of $40 billion per month, for what will be a major expansion of the central bank's balance sheet.
The Fed's short-term federal funds rate has been within a target range of zero to 0.25 percent since the end of 2008, and the central bank previously indicated that it would hold the line on rate increases until 2015.
The FOMC on Wednesday tied the eventual increase in rates to economic benchmarks, saying that the "exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."
This was the first time the Fed tied the federal funds rate directly to the unemployment rate.
Fed chairman Ben Bernanke said later during a press conference that "clearly the 'fiscal cliff' is having effects on the economy," according to an Associated Press report. Bernanke urged President Barack Obama and Congress to quickly come up with a compromise budget agreement to avoid mandatory tax increases and budget cuts, as central bank actions "cannot offset the fiscal cliff. It's just too big."
The KBW Bank Index rose slightly to close at 49.71, with 16 of the 24 index components showing gains.
Citi's International Appeal
Citigroup's shares have now returned 43 percent year-to-date, following a 44 percent decline during 2011.
The shares trade for 0.7 times their reported Sept. 30 tangible book value of $52.70, and for 8.1 times the consensus 2013 earnings estimate of $4.64 a share, among analysts polled by Thomson Reuters. The consensus 2014 earnings per share (EPS) estimate is $5.11.
Credit Suisse analyst Moshe Orenbuch on Wednesday reiterated his "outperform" rating for Citigroup, with a $48 price target, saying that the massive expense cuts announced last week, including 84 branch closings and the elimination of 11,000 jobs, wouldn't hurt the company's strategy for growing revenue in emerging markets.
Orenbuch estimated that out of the 11,000 positions being cut by Citigroup, "about 53 percent, or 5,825 of the total, will be derived from operations & technology," and said that the company's estimate that its annual revenue would decline by only $300 million as a result of the cuts was "further evidence that the reductions will largely center on non-client facing positions, limiting the negative impact to Citi's top line."
Credit Suisse estimates that Citigroup will earn $5.10 a share in 2013, with EPS rising to $5.70 in 2014.
BB&T's Margin Squeeze
Shares of BB&T of Winston-Salem, N.C., rose over 1 percent to close at $28.85. The shares have now returned 18 percent year-to-date, following a 2 percent decline during 2011.
The shares trade for 1.8 times tangible book value, according to Thomson Reuters Bank Insight, and for 9.9 times the consensus 2013 EPS estimate of $2.93. The consensus 2014 EPS estimate is $3.18.
Based on a quarterly payout of 20 cents, the shares have a dividend yield of 2.77 percent.
After his firm hosted a series of investor meetings with BB&T CFO Daryl Bible, Deutsche Bank analyst Matt O'Connor on Wednesday reiterated his "neutral" rating for the company's shares, with a price target of $34, saying that the stock was "off 15 percent (underperforming the group by 700 basis points) since the recent Oct. 5 peak," through Tuesday's close, reflecting "estimate reductions (we've cut our 2013 by 10 percent) due to likely lower than previously expected net interest income (lower rates, slower loan growth, and run off of purchase accounting accretion)."
BB&T's third-quarter net interest margin (NIM) — the difference between the average yield on loans and investments and the average cost for deposits and borrowings — was 3.94 percent, declining only one basis point from the previous quarter, but company estimated that the margin would narrow "to the mid-3.70s-percent range in 4Q12."
O'Connor said that "earlier this month, BBT noted 4Q's NIM was coming in slightly better than expected — at around 3.80 percent. However, low rates and run off of purchase accounting accretion is likely to put additional pressure on NIM in 2013/beyond."
Today's announcement by the Fed won't do anything to ease BB&T's net interest margin pressure, but the continued monetary stimulus could help the company achieve its expected loan growth of 5 percent to 7 percent in 2013.
O'Connor estimates that BB&T will earn $2.90 a share in 2013. The analyst said that "it's tempting to get more positive" on the shares because of a valuation to forward earnings estimates that is only slightly above peers, with expectations for above average loan growth, "driven by good business/geographic mix and execution." On the other hand, his firm still sees "modest downside to 2013 consensus estimates (of 2 percent to 4 percent) and our 2014 [estimate] of $3 is 6 percent below consensus (with [additional] downside if interest rates don't rise)."
—By TheStreet.com's Philip van Doorn
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