Top Large Cap Banks For 2012 Picked By Morgan Stanley: Part III

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 |  Includes: PNC, RF, STI, STT, USB, WFC
by: Insider Monkey

<< Return to Part II

Morgan Stanley has published a report entitled “Large Cap Banks” on November 28, 2011. They have tried to identify banks that can get larger C&I share, are less exposed to eurozone, and have higher dividend yields. Rich trust banks with low earnings per share growth and fewer catalysts have been given an underweight rating. We will discuss their analysis in a series of three articles. This is the third and the last of the three (first part, second part).

PNC Financial (NYSE:PNC) has been given a buy rating by Morgan Stanley due to its ability to offset lower yields. Morgan Stanley thinks that if PNC Financial is able to close the RBS Bank USA deal without seeing a need to raise $500 million of equity, earnings per share can significantly rise. Morgan Stanley says that the company also has a lower risk loan portfolio. Currently, its shares are trading at $58.5 and are expected to go north of $63. If the economy recovers sooner than expected and a price to book value ratio of 1.6x is achieved, share price may rise to $70. PNC Financial has a dividend yield of 2.5%.

Regions Financial (NYSE:RF) has been given an underweight rating by Morgan Stanley due to its slower pace in credit improvements compared to its peers. The company’s loan balances are expected to decrease next year due to the bank’s CRE and construction loan run-off. MS thinks that an increase in employment in the southeast will likely be beneficial for Regions Financial. Shares of the company are expected to rise to $5 by the end of 2012.

State Street Corporation (NYSE:STT) has been given an underweight rating by Morgan Stanley due to the low Fed rates which are adversely affecting its net interest margin and issuance of new securities. Morgan Stanley expects other large cap banks to perform better over the next 12 months. Despite that, State Street is likely to increase shareholder returns in the form of higher dividends. A payout ratio of 69% is expected in 2012. Currently, its shares are trading at $41 per share and are expected to fall to $40 in 2012.The company has a dividend yield of 1.8%.

SunTrust (NYSE:STI) has been given an equal-weight rating by Morgan Stanley. They have shown an improvement in credit quality which is at par with its peers, but Morgan thinks that SunTrust needs to decrease its expense ratios. If the company takes advantage of C&I loans, as well as reduces costs, it can perform better than the current expectations. Shares of the company are currently trading around $17.7 per share and are expected to rise to $22. In a bullish scenario, share price of $26 may be expected, by the end of next year. John Paulson had nearly $550 million invested in STI at the end of September (see John Paulson’s portfolio).

U.S. Bancorp (NYSE:USB) has been given a buy-rating due to its ability to return capital to shareholders. Compared to other large cap banks USB doesn’t have a large exposure to the European markets and it has lower EPS volatility. Morgan Stanley expects total payout ratio to increase by 19% to 51% by the end of 2012. Also, dividends are expected to grow by 64% over the next two years. A strong growth in commercial and residential mortgage market will likely drive average loans up by greater than 7%. Shares of USB are currently trading around $27.5 per share and are expected to go north of $31 by the end of next year. MS believes that it can go up to $45 in a bullish scenario assuming a P/BV multiple of 3x. Bancorp has a dividend yield of 1.8%.

Wells Fargo & Co. (NYSE:WFC) has been given an overweight rating due to its ability to decrease costs, cross sell, and buy back shares. This strategy is likely to raise earnings per share by more than 11%, which is higher than its competitors. WFC is currently trading at $27.7 and is expected to reach $31 per share. If the eurozone crisis is resolved by next year and Washington DC becomes business oriented, the company’s share price is expected to reach $34. Wells Fargo has a dividend yield of 1.9%. Warren Buffett had nearly $9 billion invested in WFC at the end of September (see Warren Buffett’s top stock picks).

Disclosure: I am long MS.