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10 Big Banks Stocks to Watch In the 'Kitchen Sink' Quarter (Update 3)


The Federal Reserve Open Market Committee on Dec. 12 said that it would continue its purchases of mortgage-backed securities at a pace of $40 billion a month, while also "initially" continuing to buy $45 billion in long-term U.S. Treasury securities each month, in a continued effort to hold long-term rates down. The Fed also stopped its concurrent monthly sales of short-term securities, meaning that the central bank's balance sheet, at least initially, is growing faster in 2013 than it did during 2012.

The Fed's latest actions may not have the desired effect. JPMorgan Chase analyst Vivek Juneja said in a report on Tuesday that "10 year Treasury yields are up sharply by 32bp from early December lows to 1.90%. If this is sustained and followed by equal rise in 30yr MBS yields (up 21bp to date), it could modestly reduce net interest margin (NIM) pressure with lower reinvestment risk." Of course, higher interest rates would also have the effect of slowing down the mortgage refinance wave and lowering banks' income from mortgage originations and sales.

Juneja said that "overall, we expect a weak 4Q for large cap banks as pressure on net interest revenues and weak trading should be partly offset by continued strength in mortgage origination revenues and investment banking fees plus improved credit quality with continued sharp decline in loan loss reserves." The analyst said that there was "a sharp pick-up" in commercial and industrial (C&I) lending by banks late during the fourth quarter, "which would not help 4Q12 much but bodes well for 2013."

So for the fourth quarter investors can expect many of the banks to trumpet their improved loan growth, while bottom-line results will continue to be padded by the release of loan loss reserves, and a continued decline in net interest margins is offset by strong mortgage results.

Earnings Previews

Leaving out the "big four" U.S. bank and the trust banks, here are earnings previews for the ten largest KBW Bank Index components by asset size. The names are ranked by descending ratio of price to 2013 consensus earnings estimates:

10. M&T Bank

Shares of M&T Bank (MTB) of Buffalo, N.Y., closed at $102.46 Monday, trading for 2.4 tangible book value, according to Thomson Reuters Bank Insight, and for 12.5 times the consensus 2013 earnings estimate of $8.21 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $8.89.

The shares returned 33% during 2012, following a 9% decline during 2011.

Based on a quarterly payout of 70 cents, the shares have a divided yield of 2.73%.

M&T in August announced a deal to acquire Hudson City Bancorp (HCBK) of Paramus, N.J., for $3.7 billion in cash and stock. Hudson City had $41.9 billion in total assets as of Sept. 30, with 135 branches in New York, New Jersey, and Fairfield County in Connecticut. The merger is expected to be completed during the second quarter.