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Analyst Forum

April 20th, 2012 |

Market Intelligence

Bank and thrift stocks have come back from the dead, especially those of the nation’s largest financial institutions. Bigger banks tended to show better return on assets and return on equity than smaller banks.

M&A pricing also is improving, and many predict a long-sought surge in M&A activity in the banking sector this year. That could further help bank and thrift values, says Peyton Green, an analyst with Sterne Agee & Leach Inc., who is interviewed in this quarter’s Analyst Forum.

Deposits in bank vaults are at nose-bleed levels, which haven’t done banks much good in an environment where there is tepid loan growth and low interest rates. The Federal Reserve announced in March it would likely keep interest rates low at least until 2014, which should continue to put pressure on bank earnings in the years ahead.

Top M&A Deals in Value Year to Date through March 1 // Prosperity Bancshares/American State Financial, Feb. 26, $529 million, 206 percent PTBV* // Tompkins Financial/VIST Financial,  Jan. 25, $110 million, 116 percent PTBV* // Old National Bancorp/Indiana Community Bancorp, Jan. 24, $103 million, 120 percent PTBV* (Source: SNL Financial)  *PTBV is price to tangible book value

What’s Ahead?

Peyton Green is a senior research analyst covering banks and thrifts at Sterne Agee & Leach Inc. He talks about why he thinks bank stock valuations will improve this year, and predicts which banks and thrifts will do better than most.

Stock valuations for banks have been improving. What do you expect for this year?

I think the valuations will do surprisingly better than people expect. Live bank M&A is slowly starting to pick up. M&A always causes investor activity in the sector to pick up.

Forward looking statement: What are your favorite stocks?

We like UMB Financial Corporation in Kansas City, Missouri. It is more of a financial services company with nonbank financial services, such as asset management, wealth management and securities processing. Those businesses have been growing at a double-digit rate the last couple of years.

On the credit leverage side, we like MB Financial Inc., in Chicago. The company has provided for loan losses of about 12.9 percent since the end of 2007 and charged off about 11.6 percent of its loan book, so it has been a very difficult cycle. But [recently], it was able to redeem TARP Preferred [Troubled Asset Relief Program stock] without any kind of common raise or debt offering. We think results will improve significantly this year.

One that will be a stock to own during the next couple of years is TCF Financial Corp. in Wayzata, Minnesota. They went about a balance sheet restructuring where they sold a good portion of their bond portfolio and got rid of high cost offerings and it’s going to benefit earnings by about 30 cents per share going forward.

For a longer version of this interview and more data on bank stocks, see Analyst Forum at BankDirector.com.

Stock Retrospective

Scott Siefers, managing director at Sandler O’Neill + Partners L.P., follows up on his prediction that Wells Fargo & Co, PNC Financial Services and U.S. Bancorp would all perform well, despite the economic environment.  PNC and U.S. Bancorp underperformed the overall big-bank sector, which was helped by a 40 percent increase in Bank of America stock year-to-date as of mid-March.

“The one thing that has changed is the economy appears to be on slightly more solid footing than a few months ago,’’ he says. “Those are still the best names, but the group as a whole has performed better as a result of the economic improvement. The names that have done really well have been high-risk names, such as Bank of America. PNC and U.S. Bancorp did well last year, so they’re starting off in a better position. The relief rally isn’t going to affect them.”

nsnyder

Naomi Snyder is the managing editor for Bank Director, an information resource for directors and officers of financial companies. You can follow her on Twitter at twitter.com/naomisnyder or get connected on LinkedIn.