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Bruce Berkowitz's Fairholme Fund runs a heavily concentrated portfolio. In looking over Fairholme's holdings, investors might be able to gear up for the a new year of bank investing turmoil. Earnings season has gotten into full swing as a number of banks are expected to release quarterly results this week. PNC, BB&T, Bank of America and Citigroup release earnings January 17th, which should give further insight into how 2013 will shape up for the major banks. Wells Fargo posted better than expected earnings last week. The estimates were at $0.89, but the bank posted $0.91.

A fund on the mend. During the first decade of the 2000s, Fairholme was returning over 10% and the S&P 500 was losing 1% yearly. In 2011 Fairholme lost 30% on AIG and Bank of America losses, but in the first three quarters of 2012 the fund ratcheted up its bank holdings and returned 35% over the period. Over 75% of its portfolio is weighted toward financials.

Fairholme's Financial Positions Over Time:

Q3/2012

Q2/2012

Q1/2012

4Q/2011

3Q/2011

AIG

1st

1st

1st

1st

1st

Bank of America

3rd

3rd

3rd

3rd

3rd

CIT Group

6th

4th

4th

2nd

6th

Citi

11th

12th

11th

10th

4th

Wells Fargo

13th

13th

13th

13th

22nd

Non-bank bets: Two non-bank financial stocks include American International Group, Inc. (NYSE:AIG) and CIT Group. AIG is Fairholme's largest holding and it has 40% of its portfolio invested in the stock. AIG continues to be one of the cheapest financial stocks on a book value basis. It trades at a price-to-book ratio of 0.5 and with a tangible book value of $68. CIT Group makes up Fairholme's 6th largest position and is in a more niche market, the commercial financing and leasing sector. The finance company has a price-to-book below 1.0x and has now been transitioning to the real estate finance sector and also launched an online bank.

Wells Fargo & Company (NYSE:WFC) is Fairholme's 13th largest holding and has remained so for several quarters. After solid earnings growth quarter after quarter for almost three years, Wells Fargo could finally be leveling off after seeing its net interment margin down ten basis points. Since the end of Q1-2009 Wells is up 150%. What has helped bring the bank higher is its industry leading exposure to the mortgage industry, where the mortgage-originator's earnings have been riding high on elevated levels refinancings. Could 2013 be a year for under-performing banks? What will drive banks in 2013 is loan growth and net interest margin expansion, but without economic growth, it is hard to see the already well priced banks moving higher. Other top banks include JPMorgan Chase & Co. (JPM), Bank of America Corp (NYSE:BAC) (Fairholme's 3rd largest stock holding) and Citigroup Inc. (NYSE:C) - which is also Fairholme's 11th largest position.

Wells Fargo is quite the diversified bank with the number of diversified financial services and products that it offers to consumers and businesses, including banking, investment and insurance. From Q1-2009 to 3Q-2012, Wells has provided one of the best returns on equity, with ROE of 12.5%. Wells' stellar performance has been rewarded. The valuation shows 1.3x book value and book value has grown 13% over the last five years, both of which are industry highs. The book value is a 20% premium to the industry average. Weakness in 2013 should result from a weakening mortgage banking fee income and lower net interest income, due in part to a narrowing net interest margin. The real concern over Wells is valuation, not to mention earnings concerns related to a slowing refinance market.

JPMorgan has managed to outperform as well. Its dividend yield of 2.6% is one of the industry's top, along with its 10% return on equity. A couple big caveats for JPMorgan and Bank of America is their relatively high debt-to-capital ratios, 75% and 70%, respectively. Citi has seen its book value decline 25% over the last five years and has a price-to-book of only 0.7. The bank's previous quarter showed the company shedding 4% of its workforce or 11,000 jobs.

Bank of America and Citi also have the lowest return on equity in the industry, 2% and 4%, respectively. Although Bank of America recently settled mortgage claims from Fannie Mae (OTCQB:FNMA), the bank still has some of the largest exposure to Europe. At the end of 3Q-2012 the total exposure to Europe was $11.5 billion. After Wells' recent earnings, it could be time to trade in the big banks for some banks which are poised to move higher. Two overlooked banks operating in the regional sector that could be poised to move higher include PNC Financial Services (NYSE:PNC) and BB&T Corporation (NYSE:BBT).

As the major banks are jockeying for investor capital, regional bank PNC could soon find itself on investors' radars. The major-regional pays a 2.7% dividend yield, one of the highest in the industry, with only a 30% payout. An upside for PNC has been its limited dependence on the credit markets, where more than half of its revenue is derived from fee businesses. PNC is expected to grow next year's earnings by 20% and it has the best debt-to-capital position at 50%. BB&T pays a dividend yield of 2.6% and still trades at a price-to-book of only 1.1x. Its organic growth strategy has allowed the bank to increase its net interest income from increased client deposits. The net interest margin was up to 4.06% in 2011, from 4.03% in 2010 and 3.66% in 2009, respectively.

Both of the regional banks should perform well this year, but Fairholme's big bets on underperforming banking giants, Citi and Bank of America could also perform well.

Source: Taking Your Banking Advice From Bruce Berkowitz's Fairholme