It's time for bank stock investors to look beyond the "cheap" and add some higher quality names to their portfolios.
Some of the best bank stock money makers this year have been the names that were so lousy last year, and they still haven't made up what they lost.
Bank of America is a great example, and, of course, a favorite punching bag. The company's shares were up 76 percent year-to-date as of Wednesday's close at $9.77, which is, of course, quite impressive. However, this year's stellar performance follows a 58-percent decline during 2011. The shares are actually down 26 percent since the end of 2010, and are down 74 percent over the past five years.
Bank of America's shares trade for a low 0.7 times their reported Sept. 30 tangible book value of $13.48, and for 10 times the consensus 2013 earnings estimate of 97 cents a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.27. Stifel Nicolaus analyst Christopher Mutascio on Monday upgraded the shares to a "buy" rating, saying that because of cost cuts, Bank of America will see much greater earnings growth in 2014 than the other money center banks.
Another high flyer among stocks of the largest U.S. banks is Regions Financial of Birmingham, Ala., with shares returning 54 percent year-to-date through Wednesday's close at $6.58. This year's recovery — during a year of transition with Regions selling its Morgan Keegan subsidiary in the first quarter followed by a common equity raise and exit from the Troubled Assets Relief Program (TARP) in the second quarter — follows a 38-percent decline for the stock in 2011. Shares of Regions are down 5 percent since the end of 2010, with a negative five-year total return of 68 percent.
Shares of Regions trade for 0.9 times their reported Sept. 30 tangible book value of $7.02, and for nine times the consensus 2013 EPS estimate of 77 cents. The consensus 2014 EPS estimate is 82 cents. Following the next round of Federal Reserve stress tests during the first quarter, long-suffering investors will be looking for a return of capital from the company. Credit Suisse analyst Craig Siegenthaler on Nov. 14 estimated that Regions will be approved by the Fed to raise its quarterly dividend to four cents from once cent, and to buy back $249 million worth of shares during 2013.
Bank of America and Regions have been winding down certain areas of their business over the past few years, as they have navigated the credit crisis, and now face the industry-wide challenges of narrowing net interest margins and weak loan demand. Both trade at relatively low multiples, and may well see another year of outstanding returns next year.
But bottom-fishing isn't for every investor. The three growing regional names that we profile below have seen positive total returns year-to-date, and for five years, through Wednesday's close. All have been steady earners and all are well-positioned for the difficult rate environment, with strong loan growth and two have strong or growing fee revenue.
These names also trade at significantly higher valuations than Bank of America and Regions, however, you must pay a premium to own a growing business that is also growing earnings, and these names appear to have significantly lower downside than many of the big names, if the U.S. economy slips back into recession.
Here are the three growing bank stocks for Black Friday, in order of ascending total assets:
3. Signature Bank
Shares of Signature Bank of New York closed at $70.34 Wednesday, returning 17 percent year-to-date, following a 20-percent return during 2011. The five-year total return for the stock was 104 percent.
The shares trade for 2.1 times their reported Sept. 30 book value of $33.80, and for 16 times the consensus 2013 EPS estimate of $4.29. The consensus 2014 EPS estimate is $4.69.
Signature Bank had total assets of $16.5 billion as of Sept. 30. The bank reported third-quarter earnings of $47.7 million, or a dollar a share, increasing from $45.3 million, or 96 cents a share, in the second quarter, and $38.4 million, or 83 cents a share, in the third quarter of 2011. Total loans grew by 9 percent just in the third quarter, to $8.8 billion as of Sept. 30, growing by 28 percent from a year earlier.
Net interest income was up 6 percent sequentially and 20 percent year-over-year, to $141.7 million in the third quarter, and the company even bucked the industry trend, with its third-quarter net interest margin — the difference between the average yield on loans and investments and the average cost for deposits and borrowings — widening to 3.56 percent, from 3.54 percent the previous quarter, and 3.51 percent a year earlier, however, the bank said that if loan prepayment income was excluded, the margin "decreased 3 basis points to 3.41 Percent, compared with 3.44 percent for the 2012 second quarter."
Following the bank's earnings announcement, KBW analyst Christopher McGratty wrote that "in the world of modest economic growth, Signature continues to defy the banking odds, producing 36 percent [annualized] loan growth in what we had expected to be a seasonally slower growth quarter. Not only was the growth impressive, but we were particularly encouraged to see a 2-point improvement in efficiency (to 36.6 percent) as it appears that the company is already gaining operating leverage within Signature Financial."
The efficiency ratio is, essential, the number of pennies of overhead for each dollar of revenue. Most banks struggle to get the efficiency ratio down to 50 percent, and Signature Bank is one of the most efficient publicly traded banks in the country, according to data supplied by Thomson Reuters Bank Insight.
The bank reported a third-quarter return on average assets (ROA) of 1.18 percent and a return on average equity (ROE) of 12.24 percent.
McGratty rates Signature Bank "market perform," with a price target of $70, and sees great things ahead for the bank: "Loan growth occurred across all asset classes and we learned that SBNY has recently hired two additional teams. Looking ahead, we expect the growth momentum to continue and we are now looking for 30-percent loan growth in 2013 versus 27 percent previously as results are likely to continue to benefit from further momentum in its core lending franchise but also recent initiatives within Signature Financial," which is the bank's specialty finance subsidiary.
Jefferies analyst Casey Haire rates Signature Bank a "buy," with a price target of $77, and said on Oct. 23 that the then consensus 2013 EPS estimate of $4.20 looked "conservative given the current EPS run-rate is already $4/share and the momentum within loan growth." Haire is out in front of the consensus, estimating the bank will earn $4.40 a share in 2013, followed by EPS of $4.85 in 2014.
2. SVB Financial
Shares of SVB Financial of Santa Clara, Calif., closed at $55.61 Wednesday, returning 17 percent year-to-date, after declining 10 percent during 2011.
The five-year total return for the stock was 11 percent, through Wednesday's close.
The shares trade for 1.4 times their reported Sept. 30 book value of $40.10, and for 15.5 times the consensus 2013 EPS estimate of $3.60 a share. The consensus 2014 EPS estimate is $3.80.
SVB Financial is the holding company for Silicon Valley Bank, which has offices in the U.K., Israel, China, and India, in addition to 27 offices throughout the U.S.
The company focuses on lending to technology companies, providing multiple services to venture capital and private-equity firms that invest in tech and biotech, and also on private banking services for high net worth individuals, in its home market in the Silicon Valley area.
SVB Financial had $21.6 billion in total assets as of Sept. 30, and reported third-quarter net income available to common shareholders of $42.3 million, or 94 cents a share, declining from $47.6 million, or $1.06 a share, in the second quarter, but increasing from $37.6 million, or 86 cents a share, during the third quarter of 2011.
Third-quarter net interest income was $154.4 million, increasing from $151.9 million the previous quarter, and $135.5 million, a year earlier. The third-quarter net interest margin was 3.12 percent, narrowing from 3.22 percent in the second quarter, but down only slightly from 3.13 percent in the third quarter of 2011. SVB said the margin narrowed mainly because of "a decrease in the overall yield of our loan and available-for-sale securities portfolios," and that "the decrease in yields was partially offset by growth in average loan balances, which has resulted in a favorable change in our mix of interest-earning assets."
Third-quarter noninterest income declined to $69.1 million, from $80.4 million the previous quarter, and $95.6 million a year earlier, reflecting higher gains on securities and derivatives in the prior periods.
The company's total loans grew 5 percent sequentially and 29 percent year-over-year, to $8.2 billion, as of Sept. 30.
SVB Financial's third-quarter return on average assets was 0.77 percent and its return on average common equity was 9.44 percent.
JPMorgan Chase analyst Steven Alexopoulos on Nov. 13 pointed out that "in the backdrop of a slowing economy and the 'fiscal cliff,' as people and companies continue to innovate, we see SIVB as one of the few banks positioned to post strong loan growth, with a three-year average loan [compounded annual growth rate] of 20.3 percent (vs. peers at 0.3 percent) likely to remain intact."
"With loan growth being one of the very few remaining tools left in the industry's toolkit to combat the [net interest margin] storm, SIVB is also well positioned from a NIM perspective," according to Alexopoulos.
The analyst rates SVB Financial "overweight," with a price target of $68, and estimates the company will earn $3.42 a share in 2013.
"The key to SIVB's loan growth will be staying with innovation companies as they grow," Alexopoulos said. "With SIVB being one of the very few early stage lenders in the country, the company has a significant growth opportunity in staying with these companies as they become larger."
1. First Republic Bank
Shares of First Republic Bank of San Francisco closed at $33.78 Wednesday, returning 11 percent year-to-date, following a 5-percent return in 2011.
The shares trade for 1.7 times their reported Sept. 30 tangible book value of $20.37, and for 11.5 times the consensus 2013 EPS estimate of $2.93. The consensus 2014 EPS estimate is $2.96.
First Republic had $32.6 billion in assets as of Sept. 30. The bank has offices in with offices in California, Oregon, Connecticut, Massachusetts, and New York, focusing on private banking and jumbo mortgage lending.
The bank on Nov. 2 announced a deal to acquire Luminous Capital of Los Angeles, which is an investment advisor with $5.5 billion in assets under management. The cost of the deal was not disclosed, but the First Republic reassured investors by saying that "the six partners of the firm will sign long-term employment contracts as part of the transaction," which is expected to close by the end of the year.
First Republic reported third-quarter earnings available to common stockholders of $97 million, or 72 cents a share, increasing from $87.8 million, or 66 cents a share, in the third quarter of 2011. The company said that "excluding the impact of purchase accounting, net income for the third quarter of 2012 was $78.7 million, up 43 percent from last year's third quarter. On this non-GAAP basis, the third quarter diluted EPS were $0.54, up 29 percent year over year."
Third-quarter net interest income was $298.8 million, increasing 3 percent sequentially, and 11 percent year-over-year. On a non-GAAP basis, excluding accretion and amortization of fair value adjustments recorded in purchase accounting, the third-quarter net interest margin was 3.47 percent, expanding from 3.41 percent the previous quarter, but narrowing from 3.49 percent a year earlier.
First Republic's total loans grew by 27 percent year-over-year, to $26.3 billion, as of Sept. 30.
The bank's operating return on assets was 1.27 percent and its return on average tangible common equity was 13.87 percent during the third quarter, according to Thomson Reuters Bank Insight.
Jefferies analyst Casey Haire on Tuesday upgraded First Republic to a "buy" rating from a "hold" rating, while increasing his price target for the shares to $39 from $35, saying that the "the addition of Luminous is not only accretive to EPS (2 percent in our view) but also boosts FRC's fee contribution into the mid-teens (vs. 12 percent in 2011), and thus decreases the company's reliance on spread income."
In light of disappointing cross-selling results from some of the largest U.S. banks, including Bank of America and Citigroup, following major acquisitions, First Republic may be quite successful in its integration of Luminous Capital, because of its focus on high-net-worth clients and reputation for strong customer service.
Haire said that "on the Luminous side, the firm can now recommend banking products to its clientele without worrying about tarnishing its brand due to poor service quality. For FRC, the addition of Luminous provides the company with a reputable and established team to extract more wealth management business from its borrower base, which is under-penetrated from a wealth management perspective (only 25 percent of FRC clients participate)."
The analyst raised his 2013 earnings estimate for First Republic $2.26 a share from $2.21, while raising his 2014 EPS estimate to $2.49 from $3.27, saying that the benefit of the Luminous acquisition would be partially "offset by last week's [$150 million] preferred issuance (at 5.6 percent coupon), which will add $8 million of below-the-line dividends annually."
—By TheStreet.com's Philip van Doorn
CNBC Data Pages:
- Dow 30 Stocks—In Real Time
- Oil, Gold, Natural Gas Prices Now
- Where's the US Dollar Today?
- Track Treasury Prices Here
TheStreet's editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks.