Investors Weigh In On Growth

A panel of three leading banking analysts from top research and brokerage firms share their insights and views on trends specific to financial institutions during Bank Director’s 2014 Acquire or Be Acquired conference in January. Moderated by Gary R. Bronstein, partner with law firm Kilpatrick Townsend & Stockton LLP, the panel discusses what bank investors consider key in terms of building a strong and profitable business.

Video Length: 46 Minutes

About The Speakers

Gary Bronstein is a partner with Kilpatrick Townsend & Stockton LLP. Gary provides a broad spectrum of strategic advice to financial institution and public company clients. He concentrates on initial public offerings and other specialized public and private capital raising transactions, M&A, proxy contests and a host of other corporate and securities law matters that arise during the life of clients.

Jefferson Harralson is the managing director, financial institutions research at Keefe, Bruyette and Woods a Stifel Company. Mr. Harralson joined KBW in 2002 and is responsible for its small and mid cap bank research groups. In 2012, Mr. Harralson was ranked as the nation’s 2nd leading regional bank analyst according to a Greenwich survey of 216 buy side firms. Mr. Harralson also heads Keefe Bruyette Woods’ southeastern bank research team, writing on 15 banks, ranging from community banks to Bank of America.

Ken Usdin is a managing director and senior research analyst at Jefferies LLC covering the U.S. banking industry. Mr. Usdin joined Jefferies LLC in 2010 and has over eighteen years of experience within the financial services industry, including fifteen years in equity research. Prior to joining Jefferies LLC, Mr. Usdin spent six years at Bank of America Merrill Lynch covering regional banks and trust/custody banks.

William Wallace is the vice president, equity research at Raymond James & Associates, Inc. He joined Raymond James in April 2011 through the acquisition of Howe Barnes Hoefer & Arnett, which he joined in October 2010. Mr. Wallace is responsible for coverage of banks and thrifts primarily located in the Mid-Atlantic and Southeast. Previously, he was an assistant vice president at FBR Capital Markets, where he assisted in the coverage of primarily mid and large cap regional and super-regional banks and thrifts. Mr. Wallace began his equity research career in 2004 at BB&T Capital Markets.

What Wall Street Thinks About the Banking Industry

A panel of three leading banking analysts from top research and brokerage firms share their insights and views on macro-economic trends specific to financial institutions during Bank Director’s Acquire or Be Acquired conference in January. Moderated by Gary R. Bronstein, partner with law firm Kilpatrick Townsend & Stockton LLP, the panel discusses the impact that a slow economy and increased regulatory pressures are having on bank stocks.

Video Length: 45 Minutes

Highlights include:

  • Comparing banks to utilities
  • Regulatory impact on M&A activity
  • Future of branching 

About The Speakers

Gary Bronstein is a partner with Kilpatrick Townsend & Stockton LLP. Gary provides a broad spectrum of strategic advice to financial institution and public company clients. He concentrates on initial public offerings and other specialized public and private capital raising transactions, M&A, proxy contests and a host of other corporate and securities law matters that arise during the life of clients.

Anthony Polini is a managing director with Raymond James & Associates, Inc. Equity Research. Anthony follows banks and thrifts primarily located in the Northeast and Mid-Atlantic, as well as several large-cap banks. He began following the banking industry in 1985, when he joined Pru-Bache Securities.

Jim Sinegal is the director of financial services research at Morningstar, overseeing equity and credit coverage of more than 250 companies in the financial services industry. Jim has covered a wide range of U.S. banks, specialty finance companies and Asian financial institutions since joining Morningstar in 2007. Fred Cannon is the director of research and chief equity strategist for Keefe, Bruyette and Woods Inc. He joined KBW in 2003, providing equity research on banks and thrifts with a specialization in the mortgage sector. Over his years at KBW, Fred’s coverage has included a diverse universe of financial institutions, ranging from community and regional banks to mortgage finance companies, and has included some of the country’s largest financial institutions, including Fannie Mae, Countrywide Financial and Wells Fargo.

Analyst Report: Community Banks Saw Improving Metrics In The First Quarter

piggy-bank-health.jpgInvestment firm McAdams Wright Ragen has recently released its first quarter 2012 Community Bank Report which includes over 1,100 publicly traded banks and thrifts and provides data broken down by asset size as well as by region. The report is a unique look at many of the banks that aren’t traded on the NYSE Euronext or NASDAQ OMX, which so get little attention in the world of equity research. When looking at a bank’s asset size in comparison to the level of non-performing loans still held on the books, the statistics show a wide variation between the largest and smallest institutions. The average Texas ratio for the largest institutions (28 percent) is much lower than that for the smallest institutions, those with under $250 million in assets (43 percent). A similar story plays out in values. Banks above $25 billion in assets traded at an average of 129 percent of tangible book value. Banks below $250 million in assets traded at an average of 69 percent of tangible book.  Smaller banks have less access to capital markets, which could impact values, but many of them have more troubled loans on the books as well, which impacts the Texas ratio. A ratio above 100 percent is an indication of a potential bank failure.

When examining regional trends, every region has seen improvement in recent quarters in almost every important metric (price/tangible book, price to earnings ratio, Texas ratio, tangible equity/tangible assets). The three areas of the country where the banks have seen the greatest improvement in price and credit (the Southeast, Southwest and the Midwest) were hardest hit by the depression in the housing market and credit crunch. While these regions’ cumulative statistics have seen the greatest improvement since the third quarter of 2012, they still lag behind those of the Northeast and West.

The full report can be accessed here.

First Quarter Bank Earnings Beat Expectations

man-jumping.jpgInvestment bank Keefe, Bruyette & Woods had this summary on first quarter bank earnings:


Our sample of 165 banks under research coverage posted a better-than-expected quarter as 80 [percent] of banks beat or met consensus estimates. The operating environment continues to be difficult for the banking industry as low interest rates remain a significant impediment to sustained fundamental improvement. The low-rate environment in conjunction with competitive loan pricing, increased regulation, regional economic challenges, and excess liquidity have all helped to pressure revenues and compress profitability for the banking industry. In [the first quarter of 2012], the banks were able to offset some of these challenges as well as typical 1Q seasonality. We highlight several key overarching themes of 1Q12: loan growth rates varied widely, [net interest margins] came in more stable than forecast, asset quality and capital levels continued to improve, and solid mortgage banking revenues helped offset seasonality in fee income.

About 80 [percent] of banks beat or met estimates. For our sample of 165 banks, on an operating-per-share basis versus consensus estimates, 114 banks (69 percent) beat, 18 (11 percent) met, and 33 (20 percent) missed. This compares to 4Q11 and 1Q11 when 42 percent and 26 percent of the banks missed estimates, respectively.

[Midwestern and Western] banks had the most earnings beats while [Northeastern] banks had the least. Twenty-six of 30 (87 percent) [Midwestern] banks beat estimates while 27 of 33 (82 percent) [Western] banks beat estimates. Meanwhile, only 8 of 17 (47 percent) [Northeastern] banks beat estimates.

Annual [operating earnings per share] growth continued for the 10th consecutive quarter, at 24 percent in 4Q11, improving slightly from 4Q11 but down from 30 [percent] in 1Q11. [Year over year] comparisons remain influenced by the impacts of the financial crisis when banks built reserves and de-leveraged balance sheets. [Operating earnings per share grew 4 percent quarter to quarter].

[Net interest margins or NIMs] were better than expected, with 44 [percent] and 52 [percent] of banks posting [year over year] and [quarter over quarter] NIM expansion, respectively. The median NIM was 3.73 [percent], down 1 [basis point year over year] but up 1 [basis point quarter over quarter].

Banks with strong capital and profitability continue to garner premium valuations. 

Loan growth results were mixed. 

Credit and asset quality improvement continues. The median [net charge off] ratio fell 22 [basis points year over year] 14 [basis points quarter over quarter] to 0.53 [percent].

2013 estimates changes were evenly distributed as 32 [percent] of banks saw estimates increase by 6 [percent] on [average], and 28 [percent] had estimates cut by 7 [percent] on [average]. Among large regionals, 40 [percent] had their ’13 estimate cut by 8 [percent on average].

What’s Ahead?

Peyton Green is a senior research analyst covering banks and thrifts at Sterne Agee & Leach in Nashville, Tennessee. 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. M&A pricing has improved slightly.  What do you expect for this year?

Six months ago, we were more bullish on bank stocks because valuations were lower than they had been a year before and more of the companies had positive catalysts in play. We thought the market offered a good opportunity to buy at a good valuation. Fast forward to today and the market has recognized a lot of the value for those catalysts. In September and October and August, when the market was falling apart because of European markets, we realized the world doesn’t all come to an end. Banks ultimately are a voting machine for the local economy. What you’ve seen year-to-date in the movement in bank stocks is the result of better economic moves on the U.S. front, rather than what’s going on in the rest of the world. I don’t know that there are many more people buying bank stocks than a year ago, but there are less people selling them. The average investor has been underweight on bank stocks for the better part of three out of the last five years. Not many of the companies have much growth. A lot of the movement in bank stocks last year was because of credit losses coming down. The best stocks that we’ve seen over the past two years have had good growth prospects.

What about this year?

I think the valuations will do surprisingly better than people expect. Everybody was worried to death about the economy getting worse but it’s gotten a little better. The other wild card that could develop is live bank M&A [not FDIC-assisted deals]. Live bank M&A is slowly starting to pick up. We’ve seen more action in the past year in economies that were less affected by the economy, for example, Louisiana and Texas, the Northeast and the MidAtlantic. Over the course of the next year, we should see that broaden out into other geographies. M&A always causes investor activity in the sector to pick up. That doesn’t mean [bank stocks are] going to go straight up. I think the sector, like the market as a whole, is due for a bit of a pull back.

Forward Looking Statement: What are your favorite stocks?

We think the barbell approach works, where you buy quality banks that benefit from an uneven playing field created by the recession. Also, we like banks that are coming out of the recession and have more improving credit leverage. We like UMB Financial Corporation in Kansas City, Missouri. It is more of a financial services company with non-bank financial services, such as asset management, wealth management and securities processing [back office operations for mutual funds and hedge funds, etc.] that make up 28 percent of the revenue base. Those businesses have been growing at a double-digit rate the last couple of years. Loans for the bank are up 6 percent to 8 percent per year and deposits have grown 10 to 15 percent per year and charge-offs have been in the 50 basis point range.

Signature Bank in New York has been able to take market share because it competes with all the too-big-to-fail banks. Once things settle down, it will be a great opportunity to pull market share and hire banking teams.

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. We would expect the Chicago metropolitan area to improve this year to provide economic opportunities.

One that will be a stock to own during the next couple of years, maybe not the next couple of quarters, is TCF Financial Corporation in Wayzata, Minnesota. We feel like the stock is really in its fourth bad year. We just think things will start improving this year. 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. They had a lot of [nonsufficient funds] fees and debit card interchange fees so they got hit on both ends [by new regulations limiting those fees]. They had 40 percent of their loan portfolio in residential mortgages in Michigan, Minnesota and Illinois. Those three states have been more adversely affected from a credit perspective than other states in the Midwest. We think this is a year where real estate values will start to stabilize and incomes start to increase a little and the bank will start to get some relief in 2013.

One of the best live bank M&A opportunities recently was executed by Hancock Holding Co. It bought Whitney Holding Corp., in June of last year. It was an $8-billion asset bank buying a $12-billion asset bank at the bottom of the cycle. We think this will be very good for Hancock shareholders and Whitney’s shareholders.  We think they’ll make $3.15 per share in 2013 and the street is predicting $2.90 per share. They have more opportunity for cost saving and their growth profile is going to start to pick up over the balance of the year.

We’ve had record high deposits in banks and low interest rates. Do you see that as a problem for the banks you cover?

There has been a ton of cash pumped into the system and that cash has found its way onto bank balance sheets, in part because people are less enamored of the money market funds. There is talk about regulating that industry. There also is simply the cyclical component where companies and consumers are deleveraging. We would expect those deposits to move out eventually. This year, as you see a pick-up in loan growth, you’d expect commercial depositors to use their depository liquidity first and then borrow money, but you simply never know. It is something we worry about in the longer run. If there was a shock in interest rates, we would worry about it and expect a behavior change.

Stock Retrospective

Scott Siefers, managing director at Sandler O’Neill + Partners, follows up on his prediction that Wells Fargo & Co, PNC Financial Services and U.S. Bancorp would all perform well, despite the economic environment. 

“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 so the relief rally isn’t going to affect them.”

“The jobs side of the economy is gaining a little traction. I can’t say I feel great about real estate. We’re plotting along on the bottom but at least some of the macroeconomic indicators are improving with a bit more traction. Where I can’t say I feel great is the [interest] rate side of the equation. As long as rates stay down, the tougher it is going to be for banks.”

Bank stocks plummet: It’s the economy, stupid.

stock-plummet.jpgThe stock market has been filled with irony (not to mention misery) lately.

Investors flocked to the safety of U.S. Treasuries, despite the fact that Standard & Poor’s had just downgraded the U.S. debt rating late Friday.

Bank of America led the market’s precipitous decline on Monday, falling 20 percent to $6.41 per share, on news that AIG was suing the bank for the insurance company’s financial problems.

The Dow Jones Industrial Average fell 5.6 percent Monday to 10,810, following last week’s biggest weekly drop since 2008, then surged in early trading Tuesday as bargain hunters came calling.

The Keefe Bruyette & Woods Bank Stock Index, which consists mostly of large-cap banks, fell 10.7 percent Monday and then recovered somewhat by gaining 7 percent the next day.

The stock market pundits had been talking about what little impact the S&P downgrade would have, and investors reacted by abandoning stocks instead.

Analysts at KBW say what’s really happening is investors are worried about the economy, not the downgrade, and that doesn’t bode well for financial stocks.

But ironically, there was no new news about the economy to warrant such a free fall, only news about the debt rating.

Perhaps investors are beginning to believe the recovery will be slow to nonexistent for a long time and it took until late summer for that to sink in. There’s also the fact that many of them have the equivalent of “panic button” orders to sell when stocks fall below a certain point.

Bank stocks often take the biggest hit when the economy falters. High unemployment and low consumer confidence means fewer loans for everything from homes to shopping centers. Plus, many of the largest banks in the country have a lot of earnings exposure to the world’s stock markets, in the form of investment banking and trading revenues.

And as banks cut back on expenses because revenue is tight, so will they cut back on employment, as evidenced by a Bloomberg News breakdown of where all the job losses will be in banking.

Scott Brown, chief economist at Raymond James & Associates, said in his weekly commentary that: “Many commercial banks, for example, have large holdings of Fannie Mae and Freddie Mac debt. These banks may, in turn, move to boost capital and reduce lending to consumers and businesses,” as a result of the debt downgrade.

Predictably, investors are being told not to panic, just at a time when it seems like everyone is panicking.

Even analysts at S&P, whose downgrade was surrounded by so much tumult, said they thought stocks have been “oversold,” and that the U.S. will likely avoid another recession, according to Forbes.

Jerry Webman, chief economist at Oppenheimer Funds in New York, told ABC News: “The most important thing for people to do right now is to take a deep breath, whether you’re reacting to the latest, pretty good job numbers or you’re still in shell shock from everything else we’ve learned in the last week.”


Why bank stocks are performing so badly

You can almost hear the wind come out of the recovery.

John Duffy, the chairman and CEO of investment bank Keefe, Bruyette & Woods gave his update on the state of the banking industry at Bank Director’s Bank Audit Committee conference in Chicago June 14, and it wasn’t a pretty picture.

As of early June, the recovery in bank stocks has stalled. This, despite the fact that 63 percent of bank stocks tracked by KBW beat analyst expectations in the first quarter.


That’s quite a change from the depths of the recession, when 73 percent of banks missed analyst expectations, back in the fourth quarter of 2008.

“I think there is some credibility being established between analysts and bank management, but unfortunately, the economic news is not always good,’’ Duffy said.

Credit quality has improved but non-performing assets still are high. Deposit growth has slowed dramatically. And even the biggest banks, which were more aggressive than the regional banks in terms of provisioning for bad loans, don’t have much room for growth.

“As you shrink the balance sheet, it’s hard to replace those assets,’’ Duffy said. “I think a lot of the optimists have now gone to the sidelines and are less convinced that the economic recovery is going to continue and that obviously has implications for loan volume in the banking industry as well as credit quality.”

Duffy said bank stock analysts are probably going to be focused on the fact that net new non-accruing loans (non-performing loans whose repayment is doubtful) rose in the first quarter for the first time in six quarters.

With all the loan problems and regulatory pressure, investment bankers such as John Duffy, who depend on M&A as their bread and butter, having been predicting a coming wave of consolidation.  It hasn’t happened yet.

With just 60 traditional, non-FDIC-assisted acquisitions this year through June 3, valued at about $3 billion in total, Duffy said he thinks it’s been difficult to raise capital, especially for banks below $1 billion in assets. Plus, there’s a lack of potentially healthy buyers in regions with a lot of hard-hit banks.

“We should think there are at least a couple hundred banks that are not going to make it,’’ he said. “For the banks that are healthy, we continue to think this remains a real opportunity.”

Why bank stocks underperform

Fred Cannon and Melissa Roberts of Keefe, Bruyette and Woods spend a lot of time dissecting the markets to understand financial stocks. Here, they give their views on how capital raises have affected the long-term performance of bank stocks, and which banks will do best when interest rates rise.

melissa-roberts.jpgMelissa Roberts is the senior vice president of quantitative research at Keefe, Bruyette & Woods. She leads a team of financial services research analysts. She holds a degree in Economics from Colgate University.

fred-cannon.jpgFred Cannon is the director of research and chief equity strategist for Keefe, Bruyette and Woods.  He has worked as Director of Investor Relations both for Golden State Bancorp and Bank of America. Fred holds a Master’s Degree from Cornell University and BS Degree from the University of California at Davis, both in agricultural economics.

What might change the underperformance of banks going forward?

Fred: It’s very important to recognize that the banks have underperformed the broad market for the last couple of years not necessarily because they haven’t been able to generate earnings, but because they’ve diluted the share count so much because of the capital raising.  It means stock prices just can’t recover to their pre-crisis levels. Citibank’s share count went from 5 billion shares to 30 billion shares.   

How much equity are financial companies raising?

Melissa:  For the entire market, they usually contribute roughly 40 percent to 50 percent in a non-crisis period.  When we got to the height of the crisis in 2008, they contributed as much as 87 percent of the total additional capital that was being raised, and that was primarily due to the TARP issuances.  In the first quarter of 2011, we found out financials were around 50 percent, but the bulk of that additional capital was really for real estate companies, not banks. 

You do a lot of other research on financials.  What surprising or interesting factors have you found influence bank stocks?

Melissa:  If you look at a stock that has a large amount of short interest, it could sometimes be thought of as a future positive for the stock, because if you’re not saying that that stock’s going to go to zero, at some point, those shorts have to cover. The large-cap banks had a maximum short interest level on March 31, 2009, where 5.9 percent of tradable shares were owned by investors shorting the stock.  Then they came down to a minimum on August 13th of 2010 of 2.6 percent. As the short interest levels were coming down in large-cap banks, those shorts were forced to cover the stock and that probably was a contributing factor to some of the outperformance of the large-cap banks.  What’s also interesting here is that if you look at when the large-cap banks hit a minimum, it’s almost simultaneous with when the regional banks hit a maximum. It seems like investors are rotating their themes.

Fred:  But I have to say some heavily shorted stocks did go to zero, so that theory doesn’t always work.

What will be the impact of rising interest rates on bank stocks?

Fred:  What you’re really looking for is banks that have both very sticky deposits that won’t leave, even when rates go up, and variable rate loans that will adjust upward with higher interest rates. I think on our list some of the ones who’ll benefit the most include Silicon Valley Bank, The PrivateBank out of Chicago, and Comerica. We believe that the Fed is on hold for short-term interest rates until the second half of 2012.  We think that until bank lending begins to grow, the Fed is going to be on hold. Ironically, the region of the country that has the slowest loan growth historically is now having the best, which is the Northeast. M&T Bank and then First Niagara, I think those are two good examples of banks who avoided much of the sins of the financial crisis, as their region did, and now are able to grow. 

What are bank investors looking for now?

Fred:  The bank stocks haven’t performed great in the first quarter, but 74 percent of the 79 bank stocks we track met or beat earnings in the first quarter. It’s not just about beating earnings; it’s also about showing that you can grow your revenue.

Forward looking statement:  We believe that the Fed is on hold for short-term interest rates until the second half of 2012.  We think that until bank lending begins to grow, the Fed is going to be on hold.

Bank Stocks Rise as Loan Losses Decline

How do investors see the banking sector right now, and why are they buying bank stocks?

Most of the tone is fairly optimistic and bullish. You want to own bank stocks when you’re going through a credit recovery cycle. Mergers and acquisitions is another big theme that stimulates investor interest.

What are some of the factors that will drive bank stock valuations in 2011?

It’s early yet, but the names that are outperforming so far are those that still are seeing declines in nonperforming assets, declines in reserve levels and net interest margin improvement.

How will M&A drive stock values?

With valuations at trough levels for some decent banks, not specifically broken banks, but banks in good markets, with good deposit share, I think there is a great investment opportunity to own a basket of potential sellers.

How much M&A activity do you expect this year?

I expect considerable amount and even more in 2012 and beyond.  My outlook for the economy is still going to be low growth, especially for the banking sector.  Banks are going to have to grow through consolidation. They’re going to have to grow through collapsing the cost structure.

It’s been a couple of years since we had a strong M&A market.  Do you think investors still remember that not all acquirers are created equal and that an acquisition can destroy value if it’s not executed properly? 

We’re reminding investors about exactly your point. You want to be in a position to own the acquirers that have shown a track record of managing the capital base well, extracting earnings power, getting the costs out, and being mindful of the cultural differences within the banks.  I think this year will be a year where any M&A is almost good M&A, but a higher level of scrutiny will be placed on deals the further we get into this cycle.

How did investors react to the Dodd-Frank Act?

The elevated expense structure is probably going to prevent banks from achieving 15 percent return on equity or 1.5 percent return on assets, which they historically produced. You’re going to get volatility in the near term. Partially, that’s because we don’t really know what the profit model is going to look like for banks.

How do investors feel about the higher capital requirements for the industry?

Investors think the capital levels are too high, and they want to see these banks deploy it or leverage it as much as they can. The investment community has much more foresight and vision than the regulatory community. The regulators are looking in the rearview mirror and saying, “We need to build capital now.”  I think the investors have it right, quite frankly, and the regulators have it wrong.

In an environment like this, I thought we’d see more emphasis on efficiency.  I can remember a time, five to seven years ago, when there was a premium in your stock if you were a low-cost operator. Is this something that investors are focused on?

Banks are not very good in general about finding ways to cut the expense line when they see revenue decreasing. I would argue banks, in general, are still overstaffed. From a technological perspective, they still haven’t embraced efficiencies in processes and procedures. I think that’s a theme that’s not being talked about very much right now, but I think it will emerge as a much more important factor as we continue with low revenue growth.

Are there a couple of banks historically that have a reputation for being good low cost operators?

The one that comes to mind is (Paramus, New Jersey’s) Hudson City (Savings Bank). These guys operate at an 18 to 22 percent efficiency ratio.

Forward-Looking Statement

“With valuations at trough levels for some decent banks—not specifically broken banks—but banks in good markets, with good deposit share, I think there is a great investment opportunity to own a basket of potential sellers.”

Will 2011 be the year for bank stocks?

The bad news seems endless. Unemployment remains high. Bad real estate loans continue to hurt banks. Increased government regulation and caps on fees will hurt bank income in the future. And yet, so many bank analysts are so bullish on bank stocks in 2011.


Profitability is returning or will return this year to many mid-sized or small banks, several analysts say.

Stronger banks will be able to buy weaker rivals and grow market share. Even the investors of struggling banks stand to gain after years of misery. Their banks will get bought out at premiums compared to the disappointing prices of the last two years. 

Here is a review of what bank analysts are saying about the outlook for bank stocks in 2011 and their favorite picks:

mmosby.jpgMarty Mosby, a bank analyst at Guggenheim Partners in Memphis,
 says he thinks all of the 15 large-cap banks he covers will be profitable by the middle of this year and he projects a 30 percent stock market gain on average for his group, which includes Winston-Salem, North Carolina-based BB&T Corp., Atlanta-based SunTrust Banks, and San Francisco-based Wells Fargo & Co. 

“We believe 2011 will be the year of the recovery,’’ he says. “We will finally see banks return to the norm.”

Some banks will be better off than others in the new normal, of course.  Banks such as Wells Fargo & Co., Pittsburgh-based PNC Financial Services Group and New York-based BNY Mellon have revenue potential and strong capital, he says, which means they could buy other banks or increase dividends, always a plus for the many dividend-starved investors out there. PNC Financial Services Group reported today record profits of $3.4 billion for 2010.

Jim Sinegal, associate director of equity research at Chicago-based
Morningstar, Incexpects his top picks such as New York-based JPMorgan Chase & Co. and Wells Fargo to return 25 to 30 percent gains for investors. He hedges that a bit by saying it may happen in the next year—or two.

“We don’t see any surprises ahead that could derail something,’’ he says. “We’ll see a slow and steady improvement. Credit is slowly and steadily improving. A lot of banks already are benefiting from that. The worst loans on their balance sheets have already been charged off.” 

He even likes Charlotte, North Carolina-based Bank of America, even though other analysts are just too worried about an ongoing investigation into the bank’s foreclosure processes to recommend the stock. 

“We think the best values can be found in recovering banks,’’ he explains. “We think the stock is cheap.”

Bank of America was trading at $14.37 per share Thursday midday on the New York Stock Exchange.

jharralson.jpgJefferson Harralson, managing director in Atlanta for Keefe, Bruyette & Woods, says smaller banks might have a more difficult time seeing stock market gains this year than big banks. They could be hit hard by new regulations that limit fee income. New restrictions on debit card fees charged to merchants could limit that source of income by as much as 75 to 80 percent, he says. 

Plus, many small and even regional banks have not paid back the government for the Troubled Asset Relief Program money, which could weigh on stock prices this year as well. Investors worried the bank will be forced to raise more capital to pay back TARP won’t be eager to buy those banks.

kitzsimmons.jpgKevin Fitzsimmons, managing director at Sandler O’Neill & Partners in New York, says 36 percent of the group’s bank stocks have a buy rating, compared to 26 percent in January of last year. 

He also thinks there will be more risk in small bank stocks this year, because the heavy weight of regulation will move to smaller banks, as in rolling downhill, as regulators begin forcing those banks to recognize their problem loans.

“This is not going to be smooth going (for all banks),’’ he says. “(The market) will be selective.”

The good news is all that new regulatory pressure on small banks could lead more banks to sell out—for a premium this time.

Sinegal said recent acquisitions have netted prices at two times tangible book value for the acquiring bank, as opposed to no premium or 1.5 times book value during the last year.

“There is more optimism that the worst is behind us,’’ Fitzsimmons says. “There has been optimism that some banks will be able to go out and acquire more banks and the acquired banks can be bought at some sort of premium.”