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2 Bank Stocks to Sell and 1 to Buy From Citigroup

Written by: Philip van Doorn 04/05/12 - 9:11 AM EDT
Tickers in this article: C STI BAC KEY CMA NYB

NEW YORK (TheStreet) -- Citigroup analyst Josh Levin on Thursday initiated or assumed his firm's coverage for 10 regional banks, with one "Buy" recommendation and two "Sell" calls.

The analyst is not enthusiastic about the group, saying that his coverage universe should trade at roughly book value, and that "given that our stocks are currently trading close to that valuation, we do not see much upside in most of our stocks at the current time."

The remarkable year-to-date bank stock rally, with the KBW Bank Index (I:BKX) rising 24% year-to-date through Wednesday's close at 49.90 -- following a 25% drop during 2011 - was largely driven by bargain hunting, with so many names trading below book value at the end of last year.

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Two of the largest U.S. bank holding companies are still trading at very significant discounts to book value and at attractive price multiples to forward earnings estimates, despite stellar year-to-date returns:

  • Shares of Bank of America (BAC) closed at $9.20 Wednesday, returning 66% year-to-date, following a plunge of 58% 2011. The shares still trade for just 0.7 times the company's Dec. 30 tangible book value of $12.95, and for nine times the consensus 2013 EPS estimate of $1.06, among analysts polled by Thomson Reuters. The consensus first-quarter EPS estimate for BAC is 12 cents, with a full-year 2012 estimate of 69 cents.
  • Citigroup (C) closed at $35.04 Wednesday, returning 33% year-to-date, following last year's 44% decline. Citi's shares are also heavily discounted, at just 0.7 times the Dec. 30 tangible book value of $49.81. The shares trade for eight times the consensus 2013 EPS estimate of $4.70. Analysts expect the company to post first-quarter EPS of 96 cents, and EPS of $4.07 for all of 2012.

Levin said that Citigroup's analysis suggested "that total loan growth on banks' balance sheets should remain anemic," but that commercial and industrial loans "have the best prospects for growth over the next one to two years."

The analyst added that "absent a rise in interest rates, regional banks are running out of tools to defend or grow their net interest margins," and projected among the regional banks he covers, "median NIM compression of ~7 bps in '12 followed by ~7 bps of NIM expansion in '13."