In his review of fourth-quarter earnings for nine of the nation's largest bank holding companies, Juneja said that results were "mixed, with strong and higher than expected [commercial and industrial] loan growth and investment banking fees, and further improvement in credit metrics," which was offset by narrowing net interest margins (NIM) for regional banks, and by declining trading revenue.
Juneja also noted that money center banks saw expanding net interest margins, and that "mortgage banking revenues remained strong, but spreads are starting to compress somewhat."
Economic reports continue to underline the long-term recovery of housing prices in the United States, which is lowering banks' credit costs. Meanwhile, mortgage lenders had a very strong 2012, amid the boom in refinancing in a time of record-low rates. But the spread between mortgage loan rates and mortgage-backed securities yields is narrowing, meaning that banks will be receiving lower premiums on the sale of newly originated loans.
Looking ahead, Juneja expects "EPS growth to slow at regional banks in 2013 but increase at money center banks which are recovering." JPMorgan expects earnings growth to be "led on average by further decline in credit costs, controlled growth in expenses, and share repurchases."
Juneja on Wednesday lowered his rating for U.S. Bancorp to "neutral" from "overweight," while lowering his price target for the shares to $37.50 from $39.50.
The analyst said that U.S. Bancorp had benefited from the credit crisis, "by growing additional businesses to drive revenue growth faster than peers over last couple of years — notably mortgage originations, which offset slowdown in payments processing fee growth." But Juneja lowered his rating for the shares because he expects "the gap in revenue growth for USB to narrow versus peers," as the company's newer businesses mature and mortgage revenue declines.
U.S. Bancorp has indeed stood out through the credit crisis, remaining profitable every quarter, while most of its large-cap banking peers did not. The company has continued to outperform during the credit recovery. Early this month, USB was featured by TheStreet among the eight actively traded banks that had managed to achieve returns on average tangible equity of at least 10 percent for every quarter since the end of 2009.
For all of 2012, U.S. Bancorp's operating return on average assets (ROA) was 1.62 percent, according to Thomson Reuters Bank Insight, ranking it first among the 24 components of the KBW Bank Index. Wells Fargo came in second with an ROA of 1.41 percent.
U.S. Bancorp's shares closed at $33.33 Tuesday, equating to 2.6 times tangible book value, which is a high valuation in the current environment. The shares trade for 10.1 times the consensus 2014 earnings estimate of $3.30, among analysts polled by Thomson Reuters. Juneja said that "the stock is appropriately valued and the valuation premium reflects USB's higher profitability."
"Therefore, with slowing revenue growth gap and appropriate valuation, we are downgrading USB to Neutral relative to peers as these will make it difficult for the stock to outperform peers."
Of course, you get what you pay for, and most sell-side analysts' price targets only take a 12-month outlook. Juneja said that "longer term, USB remains one of the best managed companies in our universe with a diverse array of revenues."
U.S. Bancorp earned $2.87 a share during 2012. JPMorgan estimates the company's EPS (earnings per share) will rise to $3.10 in 2013 and $3.30 in 2014.
Here are the four large-cap banks with "buy" ratings from JPMorgan Chase, sorted by forward price-to-earnings ratios, based on consensus 2014 earnings estimates:
Shares of SunTrust of Atlanta closed at $28.89 Tuesday and have returned 2 percent year-to-date, following a 62-percent return during 2012. The shares had fallen by 40 percent during 2011. Putting that all together, the shares are down 1 percent since the end of 2010.
The shares trade for 1.2 times tangible book value, and for 9.8 times the consensus 2014 earnings estimate of $2.94 a share. The consensus 2013 EPS estimate is $2.68.
Juneja's price target for SunTrust is $32.50, and he is ahead of the consensus, estimating the company will earn $2.78 this year, with earnings increasing to $3.10 a share in 2014.
Juneja said that "SunTrust should be one of the biggest beneficiaries from housing market recovery" among the banks he covers because the company "has had an unusually large drag from mortgage related issues on several fronts versus peers." He also said that the stock's valuation is "attractive" because "STI trades below regional peers based on tangible book multiple."
With SunTrust focused on becoming more efficient as it continues to work through problem credits in its home market, Juneja said that "acquisition risk is likely to be less than peers."
3. Wells Fargo
Shares of Wells Fargo closed at $35.27 Tuesday, returning 3 percent year-to-date, following a 27 percent return during 2012. The shares declined by 10 percent in 2011, which was strong performance, considering that KBW Bank Index was down 25 percent that year. The stock's total return from the end of 2010 through Tuesday was 19 percent.
The shares trade for 1.8 times tangible book value, and for 9.1 times the consensus 2014 EPS estimate of $3.89. The consensus 2013 EPS estimate is $3.64.
Wells Fargo on Jan. 22 raised its quarterly dividend by 3 cents to 25 cents, for a yield of 2.84 percent at Tuesday's close. The Federal Reserve had approved the dividend increase last March, as part of the regulator's annual stress test process for the largest U.S. Banks.
JPMorgan's price target for Wells Fargo is $41, and Juneja estimates the company will earn $3.65 a share this year, with earnings increasing to $3.95 in 2014.
Among the "big four" U.S. banks, including Bank of America, Citigroup and JPMorgan Chase, Wells Fargo was the strongest performer by far during 2012, with quarterly ROA rising from 1.30 percent in the first quarter, to 1.47 percent I the fourth quarter. JPMorgan Chase ranked second last year, with quarterly ROA ranging from 0.88 percent to 1.01 percent.
Juneja said that his price target for Wells Fargo is "based on 10.4x our 2014 EPS estimate, in line with peer average," and that the current valuation of the shares to his 2014 estimate is also in line with the average.
The analyst said that his positive view for the shares reflects "better fee income growth opportunities with recent acquisitions of loan portfolios, expansion of capital markets and wealth management businesses as well as leading mortgage banking position." Juneja also cited Wells Fargo's cost-control efforts, and the company's "lower international risk and capital markets exposure relative to peers."
2. PNC Financial Services Group
Shares of PNC Financial Services Group of Pittsburgh closed at $61.91 Tuesday, returning 7 percent, following a 3-percent return during 2012. PNC significantly underperformed peers last year, when the KBW Bank Index rose 25 percent. However, the shares only declined by 3 percent during 2011. The stock's total return since the end of 2010 through Tuesday's close, was 7 percent.
PNC's stock trades for 0.9 times tangible book value, and for 9.1 times the consensus 2014 EPS estimate of $6.83. The consensus 2013 EPS estimate is $6.54.
Based on a quarterly payout of 40 cents, the shares have a dividend yield of 2.58 percent.
Juneja's price target for PNC's shares is $72.50, and the analyst estimates the company will earn $6.58 in 2013, with EPS increasing to seven dollars in 2014.
PNC reported 2012 net income attributed to common shareholders of $2.8 billion, or $5.30 a share, declining from $3.0 billion, or $5.64 a share, in 2011. Revenue gains were outweighed by increases in noninterest expenses, while earnings available to common shareholders were lowered by increased dividends on preferred shares. The company in March completed its $3.5 billion acquisition of RBC Bank (USA), adding over 400 branches in the Southeast.
PNC holds a 22 percent "economic interest" in BlackRock. While PNC's revenue from its BlackRock stake was $1.1 billion in 2012, the bank's income from the BlackRock stake was only $3 million.
Juneja said that his "overweight" rating for PNC was based on attractive valuation and "multiple drivers of revenue growth," as the company expands its business through the branches acquired from RBC and through the acquisition of the distressed National City Corp. in October 2008.
The company is "actively growing fee based businesses including capital markets and treasury management as well as consumer businesses such as credit cards," he said.
Juneja added that PNC was trading in line with multiples for its peers, but said that "our target multiple reflects our belief that it should be trading closer to high quality banks given its track record of good revenue growth and conservative risk profile."
1. Bank of America
Shares of Bank of America closed at $11.49 Tuesday, down 1 percent year-to-date. The shares returned 110 percent during 2012, following an epic decline of 58 percent during 2011. The shares were still down 13 percent from the end of 2010 through Tuesday's close.
The shares trade for 0.9 times tangible book value, and for nine times the consensus 2013 EPS estimate of $1.28. The consensus 2013 EPS estimate is 97 cents.
Juneja has a price target of $13.50 for Bank of America, and is out in front of the consensus, estimating the company will earn $1.09 a share in 2013, with earnings growing to $1.41 a share in 2014.
Please see TheStreet's earnings coverage for details on Bank of America's messy fourth-quarter, which included a large mortgage putback settlement with Fannie Mae, along with participation in the $8.5 billion foreclosure settlement with federal regulators.
Juneja said that his firm's "overweight" rating for Bank of America reflects a "relatively attractive valuation," as well as the potential benefits from the housing recovery and "position as a leading retail and commercial banking franchise in the U.S."
The company's "normalized earnings should benefit from large cost cutting program under way, faster reduction in the very large legacy asset servicing and other credit related expenses as [the] housing market continues to improve, and decline in litigation expenses," Juneja said.
"There has been some good progress on mortgage related issues," he said, noting Bank of America's sizable additional reserves," for mortgage repurchase demands. These reserves totaled $19 billion as of Dec. 31.
Bank of America has also achieved compliance with its likely Basel III capital requirement, many years ahead of the full implementation of the enhanced capital rules in January 2019. The company's estimated Basel III Tier 1 common equity ratio was 9.25 percent as of Dec. 31.
— By TheStreet.com's Philip van Doorn
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