NEW YORK - U.S. Financial stocks have soared since the start of 2012. The KBW Banking index is up 16% year to date with Bank of America leading the way up close to 52% this is after the bank was the worst performing bank in 2011.Surprisingly the Pittsburgh headquartered PNC (PNC) is the worst performing bank in 2012. The company's stock is up a mere 2% year to date. This is likely because investors misunderstood their latest release. The bank showed that profitability was down substantially from $823 million the year earlier to under $500 million. However the company had special charges for a preferred share buyout and a one-time mortgage putback charge. Without these special charges earnings were far higher than the year earlier period. This underperformance so far this year should give the intelligent investor a chance to intensify his gains by selling overvalued banks.
Fifth Third Bancorp (FITB) is up 7% year to date. The company also has struggled since it posted low Q4 profits. The company showed that it is making most of its money by a drop in provisions and not from loan growth. The company though has some of the better metrics in the U.S. Banking industry. Having said that most U.S. Banks have extremely poor metrics and do not make great investments.
Regions Financial (RF) or known colloquially as Rejects Financial because of its fall from grace due to the financial crisis. RF is the only of the 10 biggest U.S. Banks to still hold TARP funds. People may be forgetting that term but it has to be embarrassing for the bank. The company made poor profitability of 9 cents a share in their latest quarter after excluding a goodwill impairment. The latest quarter was more clean for RF but it shows the company has very poor earnings power. Despite this the stock is up 36% to date.
BB&T (BBT) is also one of the few banks who have interesting metrics in the United States. The company has shown it has a new ability to make money. However it has had a lower return on tangible equity (ROTE) Than PNC, and WFC but it gets valued at twice tangible book value. PNC trades at a mind numbing 1.33 to tangible equity despite it having a 15.5% ROTE. While BB&T is not overvalued it is certainly expensive compared to its counterparts.
Wells Fargo (WFC) known as the king pin because Warren Buffett owns it has risen 16% year to date. WFC is now the biggest bank in the world excluding Chinese banks. The bank is the biggest because unlike most other large banks it did not involve itself in bad businesses. The bank is less affected by financial regulation than other major global banks. While financial rules are unlikely to be implemented in their current form because they are draconian, it is important for investors to value companies on if the politicians who don't know finance win out. WFC is up 16% year to date.
Citigroup (C) is up 30% year to date. The company plummeted following its Q4 results but investors have rallied the stock highly since. The company does not have investable metrics and while it is improving it is still not worth it.
M&T Bank (MTB) made some empty promises when they reported but the stock is also up 6% year to date. The company showed earnings shrink and did not have many valid reasons for it. Despite this the stock is maintaining its premium valuation. The bank trades at near an industry high 2.17 times tangible book value despite earning a ROTE of just 12.3% annualized from last quarter. The company is also one of the few banks to still hold TARP. Mitigating that they were one of the two only banks during the financial crisis to not cut their dividend. The other bank was
Hudson City Bancorp (HCBK), this community bank which is not really a bank. It is more of a conservatively run over-leveraged hedge fund run by CEO, Ronald Hermance. Hermance to supplement HCBK's poor loan making power decided to load up on Mortgage Back Securities (MBS) and issue debt before the financial crisis. Embarrassingly for him, MBS rates dropped and they had to continue to pay their debt at a set interest rate. No other bank in the world was foolish enough to do such a thing. Most banks used covered bonds or use deposits to finance investments but HCBK funded 50% of their operations with real debt. Meaning HCBK is not really a real bank. Despite this the stock is up 6% year to date. Like most other U.S. Banks it is not investable as it has poor metrics.
Bank of America (BAC) is up 52% year to date, which is the best in America. While the company would not be investable given its poor metrics, the one thing it has going for it, is it is cheap compared to the other banks. The company trades at the biggest discount to any bank to tangible book value at .61. However the company also has the worst profitability. The bank normalized did not make money in their latest quarter but over time it should be able to steer the ship in the right direction.
Who would trust Suntrust (STI) to keep delivering returns. The Florida based bank is is up nearly 30% this year and it is valued just under non-adjusted tangible equity. This seems to be a pretty price given what STI has indicated is its normalized earnings power and its earnings so far. STI is another non-investable U.S. Bank.
J.P. Morgan & Chase (JPM) is up 22% year to date. The bank is mostly up because it sold-off to impossible prices in late 2011. The bank will be more effected than the other banks mentioned here because it has the largest investment bank in the United States. It is hard to determine if JPM is investable because it is unsure how the investment banking business will change going forward. The analysts who recommend Goldman Sachs and Morgan Stanley over PNC and WFC, do not know what they are talking about. These analysts say GS, and MS don't have loans. That is actually a negative, a non traditional banking operation may be detrimental going forward.
Keycorp (KEY) is up 4% year to date. The company has continually reserved for no loan losses which has inflated its earnings. The bank is also non-investable.
U.S. Bancorp (USB) is up 8% year to date. The bank trades at a mind numbing 2.74 times to tangible book. The bank also has by far the most leverage of any U.S. Bank which is also why it has the leading ROTE of 23.5%. The bank is one of the few investable U.S. Banks but its high premium to other banks makes it less attractive. PNC pound for pound is delivering better returns than USB. USB is making higher returns to its increase in leverage. PNC will benefit from more leverage going forward while USB won't because of new restrictions. USB is near the maximum amount of allowable leverage.
Comerica (CMA), is somehow up 17% year to date. The bank has for the last 10 years earned extremely poor returns. The bank appears to be very safe and very boring. It was not investable 10 years ago and it is not investable today.
Zions Bank (ZION), has not reached Mount Zion yet. Zion's still owns TARP and makes very poor returns. Despite this, the stock is up 16% year to date. This is surprising given the sell-off after its quarterly results. Investors seemed to forget the poor results and just bought anyways.
Huntington Bank (HBAN), is up 6% year to date. The bank has struggled because it massively diluted its share base during 2008. TCF Financial (TCB) has not been taking care of business. The bank is suing the government over the Durbin Amendment a draconian rule that takes money out from the banks and gives them to the retailer. TCB has shown very poor results of late.
Banking in America is now less attractive but the light shines bright on PNC, WFC and USB, BBT, FITB. These are the only banks making decent returns. BAC is still the cheapest bank in the U.S. and gets a pass on its poor earnings because of this. Most of the other banks are not very attractive. WFC, USB, BBT and FITB are much more fairly valued than PNC. PNC is not the most undervalued bank in America.
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