5 Long-Term Bank Stock Picks From Jefferies (Update 1)
"At 12x 2013 earnings" estimates, Usdin said that current price "valuation seems pretty fair" for most of the banks covered by Jefferies, and said "the group will likely need even-better loan growth" than analysts expect, "to power through from here."
Of course, some of the best-known banking names outside of Usdin's coverage universe are trading at much lower multiples to forward earnings:
- Shares of Bank of America (BAC) closed at $9.57 Friday, returning 72% year-to-date, following a 58% plunge during 2011. The shares trade for just eight times the consensus 2013 EPS estimate of $1.20, among analysts polled by Thomson Reuters. Bank of America is also trading at a heavily discounted 0.8 times tangible book value, according to HighlineFI.
Citigroup (C) closed at $36.55 Friday, returning 39% year-to-date, following last year's 44% drop. Citi trades trades for eight times the consensus 2013 EPS estimate of $4.78. The shares are also discounted to 0.7 times tangible book value.
JPMorgan Chase closed at $45.98 Friday, returning 39% year-to-date, following a 20% decline during 2011. While JPMorgan is generally considered a safer play than BAC or Citi, with the shares trading for 1.5 times tangible book value, the shares still appear cheap to forward earnings, trading for eight times the consensus 2013 EPS estimate of $5.52.
Usdin favors his top picks for various reasons, including tailwinds from strong loan growth, credit improvement, an expanding net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and wholesale borrowings -- for one name, while most of the industry continues to face narrowing margins as deposits continue to pour in, while interest rates remain low.
Despite a recent spike in long-term interest rates, Jefferies expects net interest margins to "continue to grind lower given lower reinvestment yields and tight spreads on new loan production," with 75% of the firm's covered banks expected to see sequential margin declines.
Usdin expects stable first-quarter fee revenue for lenders, "as seasonal weakness in payments should be mitigated by better mortgage banking and markets-related revenue," adding that "Mortgage banking could be particularly strong given strong yearend pipelines and commentary that gain-on-sale trends are still pretty healthy."
Declining expenses is also expected to be a theme this quarter, as banks finally see material reductions in their outlay to maintain and market repossessed real estate. "Those most levered to improving environmental costs" according to Usdin include BB&T (BBT) , First Horizon National (FHN) , Regions Financial (RF) , Synovus Financial (SNV) , and SunTrust (STI) .