Next week, large regional banks including Regions Financial (RF), SunTrust Banks (STI) and U.S. Bancorp (USB) will begin unveiling their first-quarter numbers.
Regional banks have surged roughly 30% this year, as many investors, if not analysts, are seeing these stocks as underappreciated and under-priced.
And, compared to the news that seems to break daily regarding the “too-big-to-fail” banks, regional banks seem to have less of an image problem to overcome.
Specifically, investors will be looking at the level of loan loss reserve additions needed, which has crimped earnings power over the last two years. Minimal loan-loss provisioning will be the biggest potential lever in terms of sequential earnings improvement, analysts say. Wall Street will also want to see improvements in delinquency levels and declines in growth of nonperforming assets.
Banks’ so-called normalized earnings, essentially profit trends before factoring in loan loss provisions and taxes, will also start coming into focus. Wall Street wants to get some clarity on when banks will be getting back to the core business of being banks, i.e. making loans and taking in deposits.
“We believe investor focus will start to shift from credit quality and capital (which dominated the outcome of ’08/’09 results) to long-term earnings drivers,” including loan growth, net interest margin, fee income and expenses, writes Credit Suisse analyst Craig Siegenthaler in a research note to clients. “This could start to differentiate the banks that can post stronger loan growth (or lack of deterioration) and [net interest margin] improvement.”
With that said, many analysts are not projecting a strong first quarter.
According to Thomson Reuters, the 11 regional banks listed in the S&P 500 are expected to post an aggregate loss of $972 million vs. a loss of $7.56 billion in the same period a year earlier, even with expected earnings growth of 205% in the overall financial sector, Thomson Reuters says.
“Bottom line results will be poor given expectations for slowing pre-provision profits, including lower earning asset levels, seasonally weak fee income, and high expense levels. We expect about half of our coverage universe to post an operating loss in the quarter, with the remaining banks posting modestly improving profits,” according to Todd Hagerman, an analyst at Collins Stewart.
Hagerman covers 18 large and mid-size banking companies. Among the larger regional names, Hagerman predicts further upside in SunTrust, Fifth Third and Regions, all rated at buys, but says Zions Bancorp (ZION), Synovus (SNV) and KeyCorp are beginning to look expensive and rated at hold.
Overall loan demand is also expected to continue be weak combined with declining loan balances as banks work to shed troubled loans and shore up their willingness to lend out again.
Credit Suisse’s Siegenthaler believes a pullback in the stocks in the wake of earnings is inevitable given their outperformance.
“We believe investors may initially react positively to [first quarter] results … however we expect the excessive positive sentiment to drive a 10-15% pullback in stock prices after earnings,” he says. “While we remain long-term bulls on the U.S. Regional Banks, we are more cautious over the near-term due to excessive sentiment and richer valuations.”
