10 Bank Stocks You Need to Watch During Earnings Season (Update 1)

Tickers in this article: FITB STT COF JPM FNFG C STI BAC WFC PNC KEY FHN RF HBAN BK

Industry observers will also be looking for clues from Bank of America (BAC) on how the company plans to move past its bitter dispute with Fannie Mae over mortgage putbacks. At this point, Bank of America has stopped selling mortgage loans to Fannie Mae, except for HARP loans, and FBR analyst Paul Miller said on June 22 that the company "is currently not paying claims from the GSEs per our sources," with the dispute centering on "whether the agencies can push back loans if the borrower remained current for two-plus years" before defaulting.

Margin Contraction

With short term rates remaining near zero and long term rates declining, there's a limit on most banks' benefits from declining funding costs, and deployment of increased liquidity into lower-yielding securities and loans is squeezing bank profits. Hagerman said his firm saw "interest margins falling by about 5bps, on balance, for our coverage universe," and that although "the q/q decline remains manageable in the near term (particularly with improved balance sheet growth expectations), commentary surrounding net interest margin outlook and the prospects for greater-than-expected margin pressure throughout 2012 will be a key focus in the quarter."

Basel III and Trust Preferred Redemptions

With regulators' new capital requirements -- based mainly on the Basel III requirements -- excluding most trust preferred securities from Tier 1 capital, many banks are now redeeming their trust preferreds at par value -- despite the sharp decline in interest rates since the trust preferred paper was issued -- because the securities' indentures allow redemptions at par under these circumstances. This will have the effect of mitigating some of the margin pressures, while, of course, forcing yield-hungry investors to scramble for new investments.


Just last week, PNC announced plans to redeem roughly $968 million in trust preferred shares, some of which had been originally issued by National City Corp., which was acquired by PNC at the end of 2008. Also last week, U.S. Bancorp (USB) of Minneapolis announced that it would redeem $500 million in trust preferred securities.

A quick look at share valuations shows that investors continue to shy away from the nation's largest banks:

  • Shares of JPMorgan Chase (JPM) closed at $35.73 Friday, returning 9% year-to-date, following a 20% decline during 2011. The shares trade just above their reported March 31 tangible book value of $34.91, and for less than seven times the consensus 2013 EPS estimate of $5.31. The company is set to report its second-quarter results before the market opens on July 13, with analysts expecting an 83-cent profit, declining from EPS of $1.31 the previous quarter and $1.27 a year earlier. The consensus EPS estimate for all of 2012 is $4.33. The big mystery for JPMorgan is just how much of a second quarter loss the company will show, after CEO James Dimon disclosed a hedge trading loss by its Chief investment Office (CIO) estimated at "slightly more than $2 billion." Dimon said that as the company wound down the hedge trading positions, the losses might climb higher, and the New York Times reported last week that cumulative losses from the trades could eventually total as much as $9 billion.
  • Bank of America closed at $8.18 Friday, returning 48% year-to-date, after dropping 58% last year. Even with this year's recovery, the shares trade for just 0.6 times their reported March 31 tangible book value of $12.87, and for eight times the consensus 2013 EPS estimate of 98 cents. The company will report its second-quarter results on July 18, with analysts expecting earnings of 16 cents a share. The consensus EPS estimate for all of 2012 is 57 cents.
  • Shares of Citigroup (C) closed at $27.41 Friday, returning 4% year-to-date Thursday, following a 44% decline during 2011. The shares trade for just over half their reported March 31 tangible book value of $50.90, and six times the consensus 2013 EPS estimate of $6.00. Citi will report its second-quarter results on July 20, with analysts expecting earnings of 92 cents a share. The consensus EPS estimate for all of 2012 is $4.01.