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Raymond James Slashes Banks Ahead of Summer of Doom

“Strap on your helmet and buckle up as it is likely to be a bumpy ride this summer” for bank stocks investors, according to Raymond James analyst Anthony Polini.

Raymond James late on Tuesday lowered earnings estimates “at the majority of 76 larger cap banks we collectively follow (excluding trust banks) primarily reflecting record low interest rates and a slower pace of loan growth.” The firm also lowered its ratings for seven banks.

Polini said that “Friday’s disappointing job report [with the U.S. unemployment rate increasing during April to 8.2 percent from 8.1 percent] sparked a meaningful selloff in the sector, which had already been in selloff mode since the end of (first quarter 2012) earnings season in early May,” and that “going forward, we see low rates persisting at least for the nearer-term with the view that the economic data/sentiment sinks lower before improving.”

Raymond James therefore expects the trend of declining net interest margins (NIM) for banks to continue, “well into 2013.” Polini said that the “benefits of lowering funding costs and credit leverage to mitigate NIM headwinds have largely played out,” and that “lower NIMs will further compound pressure on top and bottom line profitability in the short to intermediate-term.”

Polini also expects loan growth — a very important theme for many regional banks over the past several quarters — to be “pressured in the near term,” as last week’s weak economic reports have lead Raymond James to “believe loan growth will now generally prove slower than we had originally forecast for at least the next few quarters.” Politics also comes into play as “uncertainty around tax issues, health-care costs, and further unemployment are likely to constrain spending and investment among businesses and consumers alike without a clear leader in recent presidential polls.”

Here’s a quick look at the seven banks downgraded by Raymond James late on Tuesday:

Citigroup

Polini lowered his rating for Citigroup to “outperform” from “strong buy,” while drastically cutting his 12-month price target for the shares to $35 from $48, and lowering his 2012 earnings estimate to $4.08 from $4.20, and his 2013 earnings per share estimate to $4.42 from $4.88.

Citigroup’s shares closed at $25.75 Tuesday, down 6 percent year-to-date, after dropping 44 percent during 2011. The shares trade for just over half their tangible book value, according to Thomson Reuters Bank Insight, and for less than six times the consensus 2013 earnings estimate of $4.64 a share, among analysts polled by Thomson Reuters. The consensus 2012 earnings per share estimate is $4.09.

Polini said that “persistent global economic concerns could negatively impact (Citigroup’s) relative price performance over the near term,” and that his new price target assumed the company would trade “at about 8x 2013E EPS of $4.42 or at a discount to our industry average (comprised of the nation’s 40 largest banks) of 10.4x,” with the discount “warranted given the weak domestic economic recovery and the company’s relatively high international exposure.”

Dime Community Bancshares

Polini lowered his rating for Dime Community Bancshares of Brooklyn, N.Y., to “underperform” from “market perform,” while leaving his 2012 earnings per share estimate of $1.20 and his 2013 earnings per share estimate of $1.15, unchanged.

Dime’s shares closed at $12.68 Tuesday, returning 3 percent year-to-date, after declining 10 percent during 2011. The shares trade for 1.4 times their reported March 31 tangible book value of $9.15, and for 11 times the consensus 2013 earnings estimate of $1.19. The consensus 2012 earnings per share estimate is $1.20.

Polini said that Dime’s “superior credit quality and balance sheet strength will likely take a back seat to a relatively weak outlook for EPS growth and a relatively high valuation.”

Based on a 14-cent quarterly payout, the shares have a dividend yield of 4.42 percent. Dime Community Bancshares was featured on Wednesday as one of five “buy”-rated bank stocks with attractive dividends that were relatively safe, with the companies paying out less than half of their first-quarter earnings.

Flushing Financial

Polini lowered his rating for Flushing Financial of Lake Success, N.Y. to “market perform” from “outperform,” while leaving his 2012 earnings per share estimate unchanged at $1.10, and lowering his 2013 earnings per share estimate to $1.10 from $1.16.

Flushing Financial’s shares closed at $12.57 Tuesday, returning 1 percent year-to-date, after declining 6 percent during 2011. The shares trade just below their reported March 31 tangible book value of $13.16, and 11 times the consensus 2013 earnings estimate of $1.19. The consensus 2012 earnings per share estimate is $1.09.

Based on a 13-cent quarterly payout, Flushing Financial’s shares have a 4.14 percent. The dividend payout ratio was 57 percent, based on the company’s first-quarter earnings of 23 cents a share.

Polini said that “despite strong fundamentals, the visibility for EPS growth is below average due to the challenging macroeconomic backdrop.”

IberiaBank

Raymond James analyst Michael Rose lowered his rating for IberiaBank of Lafayette, La., to “outperform” from “strong buy,” while lowering his price target for the shares to $55 from $60, and cutting his 2012 earnings per share estimate by three cents to $2.72 and his 2013 earnings per share estimate by 15 cents to $3.10.

IberiaBank’s shares closed at $45.86 Tuesday, down 6 percent year-to-date, following a 14 percent decline last year. The shares trade for 1.2 times their reported March 31 tangible book value of $37.23, and for 14.5 times the consensus 2013 earnings estimate of $3.17. The consensus 2012 earnings per share estimate is $2.70.

Based on a 34 cent quarterly payout, the shares have a dividend yield of 2.97 percent. With first-quarter earnings of 66 cents a share, the dividend payout ratio was 52 percent.

Rose said that although he continues to “view the fundamental story positively, a reduction in EPS estimates /price target renders a less attractive risk/reward given uncertainty around expenses, a lower NIM, and slower (but still robust) loan growth.”

The analyst’s $55 price target for IBeriaBank “assumes IBKC shares trade at 1.4x our 1Q13E tangible book value estimate of $39.75, in line with the southeast & southwest peer median.”

JPMorgan Chase

Polini lowered his rating for JPMorgan Chase to “outperform” from “strong buy,” while cutting his price target for the shares to $46 from $52, and lowering his 2012 earnings estimate to $4.45 a share from $4.70, and his 2013 earnings per share estimate to $5.10 from $5.48.

JPMorgan’s shares closed at $31.99 Tuesday, down 2 percent year-to-date, following a 20 percent decline during 2011. The shares trade just below tangible book value, and for six times the consensus 2013 earnings estimate of $5.35. The consensus 2012 earnings per share estimate is $4.37.

Based on a 30 cent quarterly payout, the shares have a dividend yield of 3.75 percent.

Polini said that although the valuation for JPMorgan’s shares are “very attractive, we believe uncertainty related to macroeconomic issues and the [aftermath of the second-quarter hedge trading losses announced on May 10] could undermine strong price appreciation over the near term.”

The analyst’s $46 price target for JPMorgan “is based on JPM trading at about 9.0x our 2013E EPS of $5.10, or in-line with its depressed three-year average P/E multiple of 9.0x, but at a discount to our 15-year industry average (for the nation's 40-largest banks) of 12.5x.” Polini said the “discount is warranted given the weak domestic economic recovery and the company’s relatively high international exposure.”

UMB Financial

Raymond James analyst David Long lowered his rating for UMB Financial of Kansas City, Mo., to “underperform” from “market perform,” while lowering his 2012 earnings per share estimate to $2.72 from $2.76, and his 2013 earnings per share estimate to $2.93 from $2.98.

UMB’s shares closed at $44.49 Tuesday, returning 20 percent year-to-date, after an 8 percent decline during 2011. The shares trade for twice their tangible book value, and for 14 times the consensus 2013 earnings estimate of $3.15. The consensus 2012 earnings per share estimate is $3.24.

Long cut his rating for the shares after they “substantially outperformed its peers over the last three months,” adding that “we believe revenue expectations are too high for the second half of 2012 given pressure on its NIM and trust and securities processing fees.”

Valley National Bancorp

Polini lowered his rating for Valley National Bancorp of Wayne, N.J., to “market perform” from “outperform,” while lowering his 2012 earnings estimate by two cents to 72 cents a share, and his 2013 earnings per share estimate to 70 cents from 76 cents.

Valley National’s shares closed at $10.65 Tuesday, declining 8 percent year-to-date, following a 4 percent decline during 2011. The shares trade for 2.1 times tangible book value, and for 14 times the consensus 2013 earnings estimate of 78 cents. The consensus 2012 earnings per share estimate is 73 cents.

Based on a quarterly payout of 16 cents, the shares have a dividend yield of 6.01 percent. The company earned 18 cents a share during the first quarter, for a rather high dividend payout ratio.

Polini said that “despite a very strong balance sheet, the outlook for EPS growth is below average due to the very low interest rate environment and weak recovery.”

—By TheStreet.com’s Philip van Doorn

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