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What Banks Stocks Are Really Worth

Written by: Philip van Doorn 07/31/12 - 8:56 AM EDT
Tickers in this article: JPM USB BAC WFC PNC RF

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.

The analyst said that although his firm's adjusted forward P/E for Regions "is in line with the adjusted peer group median/average, it is much higher than the company's unadjusted P/E multiple of 7.6x, which is one of the lowest in the group," adding that "one could argue that not only is our 2013 EPS estimate for RF more heavily dependent on reserve releases than others, but it is also suggests the company will be under-providing relative to its historical loan loss provisioning measures."

Mutascio said that Bank of America "remains the most expense stock in our large cap bank universe on an adjusted P/E multiple basis, trading at 12.5x our reserve release adjusted EPS estimate versus the group median of 10.2x," although "we are cognizant that BAC is trading at just 0.55x its 2Q12 tangible book value per share of $13.22."

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Among the 12 large-cap banks covered by Stifel Nicoloaus, JPMorgan Chase (JPM) "remains the cheapest... on an adjusted P/E multiple, trading at just 7.1x our reserve release adjusted EPS estimate," Mutascio said. Stifel Nicolaus estimates that JPMorgan will earn $5.10 a share in 2013, with a 79-cent reserve release, for an adjusted 2013 EPS estimate of $4.31, and an adjusted forward P/E of 8.4, based on Monday's closing price of $36.14.

JPMorgan released $2.1 billion in loan loss reserves during the second quarter, according to Thomson Reuters Bank Insight, while reporting second-quarter earnings of $5.0 billion, or $1.21 a share.

Mutascio still rates JPMorgan Chase a "Hold," saying "unfortunately, we believe the discount to the group will continue due to weak capital markets activity, slower capital redeployment, regulatory risks and EU concerns."

Among the 12 large-cap banks covered by Stifel Nicolaus, "Only 1%-2% of our 2013 EPS expectations" for U.S. Bancorp (USB) and Wells Fargo (WFC) "are fueled by reserve releases, representing the lowest contribution in our universe and high earnings quality, in our view," Mutascio said.