6 Bank Stock Picks for Earnings Season From FBR
NEW YORK ( TheStreet) -- FBR analyst Paul Miller said Monday that "mortgage banking will continue to be a dominant earnings driver through the end of 2012," and that the banking industry's first-quarter results "support the rally" in stock prices.
With "roughly 75% of the banking industry by assets having reported 1Q results," Miller expects the bank stock rally to continue, "as this quarter's solid earnings results, with the expectation of more to come, justify current valuations."
President Obama's expansion of the Home Affordable Refinance Program, or HARP 2, which allows borrowers with mortgage loans held by Fannie Mae (FNMA) or Freddie Mac (FMCC) to refinance their entire loan balances at today's low rates, no matter how much the value of the underlying home has dropped, has "yet to make a significant impact on the system," according to Miller.
Underlining the potential for growing mortgage originations to boost earnings this year, Miller said that "this quarter, mortgage banks reported some of the highest gain-on-sale margins we have seen in years," as the lenders quickly sell newly originated loans to the government-sponsored mortgage enterprises. Regional lenders are not only benefiting from HARP 2, they are absorbing business given up by Bank of America (BAC) and Ally Financial , which have been "significantly pulling back on correspondent lending, which decreased origination capacity."
Miller said that loan growth has been generally weak, with total loan balances growing "only 0.5% (sequentially) on average, aided by continued expansion in
With the largest banks continuing "to trade at a discount to small- and mid-cap peers, even after having cut the valuation gap in half (on a
FBR "continues to encourage investors to put money into" the following three large banks and also notes "company-specific opportunities" for three regional banks, also listed below:
Shares of Wells Fargo (WFC) closed at $33 Friday, up 21% year to date, following a 10% decline in 2011.
The shares trade for twice their tangible book value, according to HighlineFI, and for nine times the consensus 2013 earnings estimate of $3.67 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $3.26.
Based on a quarterly payout of 22 cents, the shares have a dividend yield of 2.67%.
Wells Fargo reported first-quarter earnings of $4.2 billion, or a record 75 cents a share, beating the consensus EPS of 73 cents. The company reported a 21% quarter-over-quarter increase in mortgage banking revenue, to $2.9 billion, supporting total revenue of $21.6 billion, which exceeded the consensus estimate of $20.5 billion.