What Banks Stocks Are Really Worth
NEW YORK ( TheStreet) -- Taking a look under the financial hood can help you better understand which bank stocks are really the "cheapest."
The easiest way to look at a banks real value is by stripping out reserve releases because -- at this point in the economic cycle -- banks are continuing to release loan loss reserves which are providing a boost to their bottom lines.
Each quarter, most banks make a provision for loan loss reserves, which is the amount added to the reserve to cover loan charge-offs. If the provision amounts to less than the bank's net charge-offs (loan losses less recoveries) that quarter, then the bank has "released" reserves. On occasion, a bank may find that it is so over-reserved, that it will report a negative loan loss provision, transferring money from reserves.
As an example of how important reserve releases are at this point in the economic cycle, Regions Financial reported net income available to common shareholders of $284 million, or 20 cents a share, while it released $239 million in loan loss reserves.
While it is important to note that Regions Financial's second-quarter earnings were reduced by $71 million, or five cents a share, from the accelerated discount accretion related to the company's redemption in April of $3.5 billion in preferred shares held by the government, for bailout assistance received through the Troubled Assets Relief Program, or TARP, there's no question that the reserve release was the main earnings driver.
Shares of Regions closed at $7.05 Monday, trading for less than nine times the consensus 2013 earnings estimate of 80 cents a share, among analysts polled by Thomson Reuters.
Stifel Nicoloaus analyst Christopher Mutascio said in a report on Monday that "approximately 26%-27%" of his firm's 2013 EPS estimates for Regions and Bank of America (BAC) "are driven by unsustainable loan loss reserve releases." The analyst also said that "between the two, our 2013 EPS estimate for BAC is of higher quality, in our view, given our projected loan loss provision expense estimate of 1.02% of average loans remains above the company's 20-year median range of 0.80%-0.85% while our estimate of 0.32% for RF is actually below its 20 year median range of 0.40%-0.45%."
During the second quarter, Bank of America's loan loss reserves declined by $1.9 billion, according to Thomson Reuters Bank Insight, fueling earnings of $2.5 billion, or 19 cents a share.
Mutascio has "Hold" ratings on both companies. Stifel Nicoloaus estimates that Regions will earn 93 cents a share during 2013, with a 24-cent reserve release, for a ratio of price to forward adjusted earnings of 10.3. For Bank of America, Mutascio estimates 2013 EPS of 80 cents, with a reserve release of 22 cents, for a forward adjusted P/E ratio of 12.6, based on Monday's closing price of $7.28.