Banks Dip Despite Optimistic Words

2/15/2016


Bank executives expressed confidence in the U.S. economy while reporting December-quarter results. Yet shares of diversified banks and regional banks have delivered some of the worst returns in the S&P 1500 Index this year, as shown in the table below.

S&P 1500 BANKS
We ranked the S&P 1500 diversified-banks and regional-banks industries versus the other 101 industries containing at least five stocks.
---- Total Return (Rank) ----
12-Month Change (Rank)
Year-To-Date
(%)
1 Year
(%)
Trailing P/E
Ratio (Rank)
EPS
(%)
Sales
(%)
S&P 1500 diversified
banks avg.
-19
(89)
-16
(55)
10
(7)
7
(56)
1
(72)
S&P 1500 regional
banks avg.
-14
(71)
-6
(33)
14
(21)
7
(54)
10
(17)
Note: P/E ratios exclude values above 75 and below zero. 12-month change numbers exclude values above 200% and below -75%.

Analyst profit estimates have declined in the past 30 days for all six diversified banks in the index. Two main culprits have caused the decline:

1) Credit losses linked to China and the energy sector. Diversified banks have limited exposure to energy:

• Bank of America ($12; BAC), $21.3 billion in loans to energy-related companies (representing 2.4% of commercial loans)

• Citigroup ($37; C), $16.7 billion (2.7%)

• Comerica ($32; CMA), $3.1 billion (7.4%)

• J.P. Morgan Chase ($56; JPM), $13.8 billion (1.6%)

• U.S. Bancorp ($39; USB), $3.1 billion (1.2%)

• Wells Fargo ($46; WFC), $17.0 billion (1.9%)

Most banks have boosted provisions to backstop loans that could sour — and many may need to take further action if oil prices stay at current levels. This commitment of capital could limit banks' capacity for dividend growth and stock buybacks in the year ahead. None of the regional banks recommended by sister publication Upside reports direct loan exposure to the energy sector.

2) Signs of slowing U.S. economic growth and the market's turmoil. Many investors fear recent events could drive the Federal Reserve to increase rates more slowly than expected. As a result, net interest margins, a key measure of banks' profitability, could remain narrow. In the December quarter, net interest margin rose from the September quarter for most diversified banks but remained more than 0.5 percentage points below levels from the December 2010 quarter.

The slump has left many banks trading below tangible book values, an unusual scenario in which shares are worth less than the hypothetical liquidation value of the banks' assets, which is based on historical costs.However, many banks have taken steps to de-risk their operations and recapitalize balance sheets since the 2008 financial meltdown.

Given the challenges facing banks, we are being selective in the sector. U.S. Bancorp ($39; USB) is being downgraded. See Portfolio Review for our rationale. We rate Wells Fargo a Buy and a Long-Term Buy. J.P. Morgan is a Long-Term Buy. Bank of America and Citigroup are rated A (above average). U.S. Bancorp is a B (average).

TOP BANKS
Below we present bank stocks, most monitored by the Forecasts or recommended in Upside. Note that none of the Buy-rated regional banks in Upside are in the S&P 1500 Index. Recommended stocks presented in bold.
Stock-
Market
Value
($Mil.)
Net Interest
------ Margin ------
Trailing P/E Ratio
12-Month
---- Change ----
Total Return
-- Quadrix Scores --
Company (Price; Ticker)
Last
Quarter
(%)
Year-Ago
Quarter
(%)
Current
5-Year
Average
EPS
(%)
Sales
(%)
Year-
To-Date
(%)
1
Year
(%)
Value
Overall
Diversified banks
Bank of America
($12; BAC)
133,615
2.20
2.47
8.7
13.2
(5)
(1)
(29)
(26)
93
70
Citigroup ($37; C)
111,089
 NA 
 NA 
7.0
10.8
44
(3)
(28)
(24)
95
79
Comerica ($32; CMA)
5,743
2.60
3.19
11.0
15.3
(4)
8
(23)
(28)
91
70
J.P. Morgan Chase
($56; JPM)
205,679
2.14
2.74
9.9
9.4
8
(2)
(15)
(1)
86
77
U.S. Bancorp ($39; USB)
68,476
3.05
3.65
12.4
13.0
0
0
(9)
(10)
68
66
Wells Fargo ($46; WFC)
239,064
2.92
3.94
11.1
11.4
1
2
(14)
(12)
77
69
Regional banks
Banc of California
($15; BANC)
565
3.52
3.53
11.3
NA
30
43
0
40
83
99
MainSource Financial 
($20; MSFG)
439
3.81
4.11
12.2
11.8
15
10
(12)
7
68
88
Pacific Continental
($15; PCBK)
299
4.34
4.61
14.7
19.6
13
21
2
15
67
96
Preferred Bank
($29; PFBC)
400
3.92
3.69
13.5
14.1
21
17
(11)
7
66
96
TriCo Bancshares
($24; TCBK)
563
 NA 
4.43
12.8
17.7
18
33
(11)
6
77
90
Note: Quadrix scores are percentile ranks, with 100 the best.   NA Not available.

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