Analyst Forum

Market Intelligence

Bank stock prices recovered handily in the last half year, especially big bank stocks. Confidence in the economy and the sector returned strongly. Bank earnings were up 37 percent in the fourth quarter among all Federal Deposit Insurance Corp.-insured banks and thrifts, although part of that has been a result of drawing down loan loss reserves rather than real organic growth. Banks have been shifting assets out of real estate. Real estate-backed loans now make up only 53 percent of the industry’s total loans and leases, down from 62 percent six years ago. However, there is real trouble ahead for banking as net interest margins continue to get squeezed in the low interest rate, low loan growth environment. Net interest margins haven’t been this low since the savings and loan crisis in the late 1980s. Mergers and acquisitions have started to pick up, but most of the deals are among small and mid-sized banks, not the big players such as BB&T Corp. and Fifth Third Bancorp.

What’s Ahead?

Jim Sinegal, director of financial services research at the independent research firm Morningstar Inc., in Chicago, talks about the recovery in bank stocks and why he likes Wells Fargo & Co., Capital One Financial Corp. and FirstMerit Corp.

There has been a huge recovery in big bank stocks in the last six months or so. How long can we expect this to last?
I think we could see a pullback. The market has gone up a lot. I wouldn’t be surprised if most of the gains are here to stay, though. It is hard to see people getting as pessimistic as they were a year or two ago.

What is your favorite stock and why?
Of the big four banks, I think we like Wells Fargo & Co. the best. It’s still the most traditional bank. It is majority funded by deposits and they have an excellent deposit base. They have funded themselves about 20 percent cheaper than their peers. Further down in size, we like [Maclean, Virginia-based] Capital One Financial Corp. and [Akron, Ohio-based] FirstMerit Corp. Capital One is a half-bank, half-credit card lender. We think it’s one of the more undervalued stocks that we cover. It’s the same story with FirstMerit. It bought Citizens Republic Bancorp [in Flint, Michigan], which had been troubled and turned itself around a lot. I think people hadn’t realized the extent that bank had improved.

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

Stock Retrospective

Collyn Gilbert, a managing director at Keefe, Bruyette & Woods, first talked to Bank Director at the launch of Analyst Forum two years ago.

Two years ago, you expected considerable amounts of M&A in 2012 and beyond.
I do think M&A is going to be a key component of the industry. Why did it not take place starting in 2012? I think what we missed was the unwillingness of management teams to pull the trigger. In 2012, you still had good earnings growth for the sector but as we look to 2013 and 2014, the earnings growth is going to slow considerably. That could be the catalyst we need to facilitate M&A.

James Sinegal

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