Bank Stocks: 2012 Winners
Banks were ahead of the broad indexes during what could only be described as a solid year for the entire U.S. stock market. The Dow Jones Industrial Average (^DJI) rose 7% for the year, to close at 13,104.14, while the S&P 500 (SPX.X) was up 13% to close at 1,426.19, and the NASDAQ Composite (^IXIC) rose 16% to close at 3,019.51, despite the year-end swoon of Apple (AAPL) .
Then again, with so much year-end profit taking, in part because of the expected increase in capital gains taxes in 2013, and with the shares now trading for $533.03, or only 10.9 times the consensus fiscal 2013 EPS estimate of $48.81 among analysts polled by Thomson Reuters, Apple could well be your best play for 2013 .
Stocks on Monday continued to rise after President Obama said in the afternoon that a budget deal to avert the Fiscal Cliff was "in sight," but that the leaders of the Senate and the House of Representatives were still negotiating. Bloomberg earlier reported that Senate Minority Leader Mitch McConnell (R., Ken.) was nearing a compromise budget deal with Vice President Joe Biden. Of course, even if McConnell and Biden are in lock-step, the big hurdle will be for Speaker of the House John Boehner (R., Ohio) to twist enough Republican arms in the House of Representatives to agree to income tax rate increases for higher income earners.
The 2012 winner among the 24 components of the KBW Bank Index was Bank of America (BAC) , with shares rising 110% to close Monday at $11.60. The 2012 recovery followed a 58% decline during 2011. The shares were still down 12% since the end of 2010.
If you were picking a bank stock a year ago, Bank of America was certainly attractive, as the shares were trading for only 0.4 times tangible book value. As of Monday's close, the shares traded for 0.9 times their reported Sept. 30 tangible book value of $13.48. The shares appeared relatively price, at 12.1 times the consensus 2013 EPS estimate of 96 cents. Then again, sell-side analysts believe that CEO Brian Moynihan's cost-cutting program will bear fruit and that the company earnings will begin a multi-year climb as the housing recovery continues. The consensus 2014 EPS estimate is $1.25.
Here are some other 2012 winners among the KBW Bank Index components:
- Second place goes to Regions Financial (RF) of Birmingham, Ala., with shares rising 67% through Monday's close at $7.12, following a 38% decline during 2011. The shares trade just above tangible book value, and for 9.3 times the consensus 2013 EPS estimate of 77 cents. The consensus 2014 EPS estimate is 82 cents. Regions during the first quarter sold its Morgan Keegan brokerage subsidiary to Raymond James Financial (RJF) for $900 million and raised $930 million in common equity through a public offering. The company then redeemed in full the $3.5 billion in preferred shares held by the U.S. Treasury for bailout money provided through the Troubled Assets Relief Program in November 2008. Credit Suisse analyst Craig Siegenthaler in November estimated that after the Federal Reserve completes its next round of bank stress tests in March, Regions will be approved to raise its quarterly dividend from a penny to four cents, and to buy back $249 million worth of shares during 2013.
- Third place goes to SunTrust (STI) of Atlanta, with shares returning 62% to close at $28.35, following a 40% drop during 2011. The shares now trade for 1.1 times tangible book value, and 10.5 times the consensus 2013 EPS estimate of $2.71. The consensus 2014 EPS estimate is $3.01. SunTrust during the third quarter made several moves to shore up its balance sheet and capital ahead of the stress tests, including the sale of its stake of Coca-Cola (KO) resulting in a pre-tax gain of $1.9 billion. Bank of America Merrill Lynch analyst Erika Penala on Nov. 26 estimated that SunTrust in March would be approved to increase its quarterly dividend from a nickel a share to 15 cents, while also repurchasing $565 million in common shares during 2013.
- Citigroup (C) was in fourth place, with shares returning 51% through Monday's close at $39.56, following a 44% decline in 2011. Citi now trades for 0.8 times tangible book value, and for 8.5 times the consensus 2013 EPS estimate of $4.65. The consensus 2014 EPS estimate is $5.14. The company on Dec. 5 announced a series of moves to cut its annual expenses by $900 million in 2013, with total expense savings increasing to $1.1 billion in 2014. The cuts included 84 branches and 111,000 layoffs, and Citi estimated that its annual revenue would decline by only $300 million. Marty Mosby of Guggenheim Securities estimates that Citigroup had $14.9 billion in excess capital as of Sept. 30, and also estimates that following the next round of stress tests, the company will receive Fed approval to raise its quarterly dividend from a penny to 25 cents a share, with the company holding off on share buybacks for another year.
- Capital One (COF) ranked fifth among the 24 components of the KBW Bank Index, with shares returning 37.5% in 2012 through Monday's close at $57.93, following a flat return in 2011. The shares trade for 1.5 times tangible book value, and for 8.3 times the consensus 2013 EPS estimate of $7.01. The consensus 2014 EPS estimate is $7.38. The company in February acquired ING Direct (USA), followed by a $1.25 billion common equity raise in March, and the purchase of HSBC's (HBC) U.S. credit card portfolio in May, for a premium of $2.5 billion. The ING deal included roughly $80 billion in deposits gathered over the Internet, along with $41 billion in loans, providing plenty of liquidity for the $28.2 billion in credit card loans acquired from HSBC. The third quarter was the company's first "clean" quarter in 2012, with a return on average tangible common equity of 21.48%. FBR analyst Paul Miller on Dec. 19 included Capital One among his list of "stocks to own for 2013," with a price target of $72, saying the company is "one of our favorite names due to its compelling valuation ($72 target = 10x our FY13 EPS estimate and 1.1x book value), expected resumption of the dividend, and increased earnings power."