Taking a look under the financial hood can help you better understand which bank stocks are really the "cheapest."
The easiest way to look at a banks real value is by stripping out reserve releases because -- at this point in the economic cycle -- banks are continuing to release loan loss reserves which are providing a boost to their bottom lines.
Each quarter, most banks make a provision for loan loss reserves, which is the amount added to the reserve to cover loan charge-offs. If the provision amounts to less than the bank's net charge-offs (loan losses less recoveries) that quarter, then the bank has "released" reserves. On occasion, a bank may find that it is so over-reserved, that it will report a negative loan loss provision, transferring money from reserves.
As an example of how important reserve releases are at this point in the economic cycle, Regions Financial (RF) reported net income available to common shareholders of $284 million, or $0.20 a share, while it released $239 million in loan loss reserves.
While it is important to note that Regions Financial's second-quarter earnings were reduced by $71 million, or $0.05 a share, from the accelerated discount accretion related to the company's redemption in April of $3.5 billion in preferred shares held by the government, for bailout assistance received through the Troubled Assets Relief Program, or TARP, there's no question that the reserve release was the main earnings driver.
Shares of Regions closed at $7.05 Monday, trading for less than nine times the consensus 2013 earnings estimate of $0.80 a share, among analysts polled by Thomson Reuters.
Stifel Nicolaus analyst Christopher Mutascio said in a report on Monday that "approximately 26%-27%" of his firm's 2013 EPS estimates for Regions and Bank of America
During the second quarter, Bank of America's loan loss reserves declined by $1.9 billion, according to Thomson Reuters Bank Insight, fueling earnings of $2.5 billion, or $0.19 a share.
Mutascio has "Hold" ratings on both companies. Stifel Nicolaus estimates that Regions will earn $0.93 a share during 2013, with a $0.24 reserve release, for a ratio of price to forward adjusted earnings of 10.3. For Bank of America, Mutascio estimates 2013 EPS of $0.80, with a reserve release of $0.22, 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 Bank of America is trading at just 0.55x its 2Q12 tangible book value per share of $13.22."
Among the 12 large-cap banks covered by Stifel Nicolaus, JPMorgan Chase (JPM)
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 US Bancorp
Stifel Nicolaus rates UD Bancorp a "Hold," and the company's shares are rather pricy, at 2.8 times tangible book value, based on Monday's closing price of $33.75. Mutascio estimates the Minneapolis lender will earn $3.10 a share during 2013, with a reserve release of only a nickel a share, making or an adjusted forward P/E ratio of 11.1.
Mutascio rates Wells Fargo a "Buy," and estimates the company will earn $3.65 a share during 2013, with a reserve release of eight cents a share, for an adjusted forward P/E ratio of 9.5, based on Monday's closing price of $33.96.
The analyst said that based on its analysis of pre-provision earnings estimates, "we still like WFC and PNC Financial
Stifel Nicolas rates PNC a "Buy," and estimates that the Pittsburgh lender will earn $6.90 a share during 2013, with a reserve release of $0.44, for an adjusted forward P/E of 9.3, based on Monday's closing price of $59.82.
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