Since last decade’s banking crisis, among the nation’s trillion-dollar asset banks there has been stratification both in terms of profitability and public reputation. Wells Fargo & Co (NYSE:WFC) is always a winner. JPMorgan Chase & Co. (NYSE:JPM) has come next, then probably Citigroup Inc (NYSE:C), followed by Bank of America Corp (NYSE:BAC) at the rear. I am going to take a look at Bank of America, this country’s second-largest bank by assets, to see if it shows any sign of emerging from its current, informal position.
One more big litigation matter resolved…
One thing to remember about Bank of America Corp (NYSE:BAC) these past several years is that things are never boring. On May 1, the big North Carolina-based bank restated its first quarter 2013 to reflect the comprehensive settlement between the firm and MBIA Inc. (NYSE:MBI). It is not that often that any financial transaction benefits both sides, but the market seemed to indicate that this particular deal did just that. MBIA Inc. (NYSE:MBI) shares increased more than 50% in the week following May 1, and Bank of America shares are treading around their 52-week high.
The substance of the earnings restatement was to reduce Bank of America Corp (NYSE:BAC)’s earnings by $1.6 billion pretax, reduce its common capital ratio by 10 basis points to approximately 10.5%, but also to raise its Basel III capital by 10 basis points to 9.5%. However, if you take all these one-time changes out of the equation, Bank of America’s first-quarter income came to $2.6 billion, or $0.20 per share, roughly four times the $653 million, or $0.03 per share, in last year’s first quarter.
But nothing is ever simple with Bank of America, and last year’s first quarterly earnings were depressed by a pretax negative value allowance due to narrowing credit spreads. Analysts had expected earnings of $0.22 per share in the first quarter of 2013. The $0.20 per share in earnings equaled a 0.5% return on assets.
Bank of America Corp (NYSE:BAC) has several different cost-cutting measures in place, collectively known as “New BAC.” The program has involved tens of thousands of job cuts, and allowed non-interest expenses to drop by roughly $1 billion compared to the first quarter of 2012.
So, the question remains: can Bank of America retain the profitability that defined the firm in the last decade, when it routinely posted returns on assets threefold higher than it currently generates? A bank of this size should at least be returning $5 billion per quarter. The cost structure is still out of whack; despite the non-interest expense decline, the bank’s efficiency ratio was 76.6, well above a healthy level for any bank. Yet the company is some 300 branches and 16,000 employees “lighter” than a year ago, and further employee reductions cannot be good for the revenue side.
Revenue is the way forward for Bank of America Corp (NYSE:BAC), and its paltry 2.4% interest margin in the quarter is not much help. Further credit improvements, such as the company’s 30%, or $700 million reduction in its provision for credit losses versus a year ago are not sustainable. I see the company’s profits hovering right around a 0.5% return on assets for the rest of this year.
But beyond that, much of Bank of America’s future will depend on pending and not as yet filed litigation. That is no way to run a bank, or in my opinion, to invest your money.
Signs of life
If Bank of America Corp (NYSE:BAC) has been the weakest big bank in terms of its balance sheet and income statements, then Regions Financial Corporation (NYSE:RF) has possibly been the weakest among the country’s large, regional banks. But after enduring the indignities of selling the previous “crown jewel” of the company in 2012 and diluting existing stockholders with a common stock offering shortly afterwards, Regions Financial Corporation (NYSE:RF) is settling down nicely.
In the first quarter of 2013 earnings came to $327 million, or $0.23 per share, up from $145 million, or $0.11 a share a year ago. Analysts had expected $0.20 per share. The earnings amounted to a 1.1% return on assets.
Regions Financial Corporation (NYSE:RF) is still in “shrink itself to health” mode. Despite an increase of four basis points in its net interest margin from a year ago, net interest income in the fourth quarter fell about $30 million, or 4% from the year-ago quarter. Non-interest income fell about $25 million, or 5%. But overcoming these are continued improvements in the bank’s asset quality, which led to a mere $10 million provision for loan losses in the quarter compared to $117 million a year earlier, and the payment of Region’s TARP loans saved the bank $46 million.
I remember when shares of Regions were below $4 per share (back in 2009). What I see today is a bank that is both profitable and well capitalized with a Tier 1 Common Ratio of 11.2% at the end of the first quarter. The company is in the midst of an authorized $350 million stock buyback, as well. As the company obtains the confidence to grow its loan portfolio, I see even better days ahead for Regions.
Better days ahead
PNC Financial Services (NYSE:PNC) had a rough 2012, primarily due to repeated reserve provisions made to offset government agency demands for mortgages, primarily made by acquired companies last decade. But things are off to a much better start this year, with first-quarter earnings of $1 billion, or $1.76 per share. This was a substantial jump from the first quarter of 2012, during which the company reported earnings of $811 million, or $1.44 per share. The earnings were an admirable 1.3% return on assets, and 12% above analysts’ projections of $1.57 a share.
The gains were a balanced mix of revenue enhancements due largely to the inclusion of the a full quarter of the 2012 acquisition of the American retail branches of Royal Bank of Canada (USA) (NYSE:RY). Non-interest expenses declined by $140 million from the first quarter of 2012, and a whopping $430 million from the fourth quarter of 2012. The company raised its dividend by 10% to $1.76 annually earlier this spring. I see PNC Financial Services (NYSE:PNC) as fairly valued today at a PEG of 1.3, but to the conservative or income-oriented investor, this stock may hold some appeal.
A rising star?
A smaller bank with more upside I have been looking at is Susquehanna Bancshares Inc (NASDAQ:SUSQ). This Pennsylvania-based bank with a little under $20 billion in assets was slow to recover from last decade’s industry crisis, but its recovery is ongoing. In its first quarter, earnings came to $42.4 million, or $0.23 per share, very nearly doubling last year’s first quarter. But still, earnings only came to a 0.9% return on assets.
Susquehanna Bancshares Inc (NASDAQ:SUSQ) is in growth mode, with loans up 30% over the past two years, and I expect earnings this year of near $1.00 per share, which would be a 25% jump from 2012, and a 150% jump from 2011. Over the next year, I expect the company’s stock to outperform the market.
All of these banks have aspects that are very appealing to the investor. It is a question of how much risk you are willing to accept. Bank of America Corp (NYSE:BAC) has plenty of upside, but nearly as much downside. Regions has ridden its recovery wave pretty much to its conclusion, now it is time to grow its loan portfolio. Susquehanna Bancshares Inc (NASDAQ:SUSQ) is benefiting from past acquisitions, and still must show continued growth while controlling expenses, and PNC Financial Services (NYSE:PNC), I believe, is well positioned for the next two years or more.
The article 3 Attractive Banking Stocks to Consider Now, 1 to Avoid originally appeared on Fool.com and is written by Bill Edson.
Bill Edson has no position in any stocks mentioned. The Motley Fool owns shares of Bank of America and PNC Financial Services. Bill is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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