Morgan Stanley (MS) analysts Ken Zerbe, Josh Wheeler, Jonathan Katz and Giselle Cheung published a report entitled “Mid Cap Banks” on December 9, 2011. They believe that these banks are currently “in a much better position than the market gives them credit for.” These banks have little, if any, exposure to the European crisis and have been “moving on macro events.” Overall, net interest margin for most of the banks is expected to decrease whereas net interest income is likely to remain stable. Loan growth may improve slightly and the share buybacks are going to triple.
This is the first of a series of articles discussing the stocks:
Associated Banc-Corp (ASBC) has been given an equal-weight rating by Morgan Stanley. In the third quarter, average loans grew by 2.9%. Morgan Stanley expects strong growth in its Commercial and Industrial business, while residential mortgage will play a smaller part in 2012. The bank’s net interest margin of 3.23% is below the group median and is expected to decline further due to low interest rates. Efficiency ratio for Associated Banc-Corp was 70% at the end of the third quarter this year and Morgan Stanley expects it to stay above its peers for a few more years. The bank’s current share price is $11 and is expected to go north of $14 by the end of next year. Morgan Stanley also expects dividends to increase to $0.05 per quarter. David Dreman and Ken Griffin had the largest positions in ASBC at the end of September among the funds we are tracking.
BankUnited (BKU) is taking advantage of the Florida market by hiring seasoned bankers who are helping the bank increase its market share. It has been given an equal-weight rating by Morgan Stanley. Residential loans have contributed to most of the growth in residential mortgages for BankUnited. Morgan Stanley expects earnings per share to decline by 16% next year and then increase once more in 2013. Morgan Stanley also expects BankUnited to use its $400 million excess capital to buy banks in Florida, helping earnings per share increase. The company has 68% of its $4 billion loan portfolio covered with the FDIC loss sharing agreements, indicating very little credit risk. Shares of the company are currently trading at $24 and are expected to reach $26 by the end of next year.
Bank of Hawaii (BOH) has been given an underweight rating despite being the most profitable bank in Morgan Stanley’s coverage. The bank’s net interest margin has been decreasing due to the run-off from loans. The Bank of Hawaii’s costs of funds are already at low levels so they are not expected to decrease further. Morgan Stanley expects a slower loan growth in 2012. The bank’s management may not have the ability to recover lost revenue through other fees but they are intending on cutting expenses. Shares of the bank are currently trading at $44 and are expected to reach $46 per share.
BOK Financial Corporation (BOKF) has been given an equal-weight rating by Morgan Stanley. It has seen strong growth, with a relatively large Commercial and Industrial portfolio. The bank’s net interest margin declined over the last quarter and Morgan Stanley expects it to continue declining until mid-2013. The bank has repurchased 492k shares in the last quarter and is considering acquisitions. BOK Financial has a high reserve ratio of 2.6% and its losses are expected to be low due to conservative underwriting, based on historical data. The bank’s Transfund business helps it obtain constant revenue and is the cause of the bank’s high return on equity ratio. BOK Financial’s shares are currently trading at $54.8 and are expected to go north of $58 by the end of 2012.
City National Corporation (CYN) has been given an equal-weight rating by Morgan Stanley. It expects to see a growth in its earning assets, which will likely benefit its net interest income. The bank saw a 5% increase in Commercial and Industrial, which was attributed to its new clients from specialty lending groups. Morgan Stanley expects the growth in the bank to remain positive. A high interest rate will help the bank increase its money market fees and Commercial and Industrial loans. Its residential mortgages are cushioned against losses due to a loan-to-value ratio in the low 50s. The bank is not looking to buy back its shares but is, on the other hand, interested in mergers and acquisitions. Shares of the company are currently trading at $44 and are expected to go north of $54 by the end of 2012.
Comerica (CMA) has the ability to generate loans faster than its peers but is dependent on the state of the economy. It has been given an equal-weight rating by Morgan Stanley. The bank is highly asset-sensitive due to its limited exposure to long-duration assets and it has a relatively large non-interest bearing deposit base, accounting for 40% of total deposits. The payout ratio of the bank is the same as its competitors, at an estimated 68%. It is looking to close the acquisition of Sterling by the end of the first half of next year, which will be accretive to earnings per share after 2012. Shares of the bank are currently trading at $25.6 and are expected to go north of $32 by the end of next year. Revenue and efficiency improvement of $100 million are estimated for 2012. Billionaire Ken Griffin’s Citadel Investment Group had $160 million invested in CMA at the end of September.
Commerce Bancshares (CBSH) has been given an equal-weight rating by Morgan Stanley. It generated 6% of total revenue from debit card fees. With the Durbin amendment lowering its income, Commerce Bancshares estimates a decrease of almost $7 million in card fees but the bank is in a better position to mitigate the impact of the agreement. Net interest margin decreased in the last quarter and is expected to rise slightly due to the settlement of its MBS purchase. The bank bought back 2.5% of its shares in the last quarter and this will continue to be an important part of its capital management strategy. Commerce Bancshares’ credit losses are below those of its competitors and it also maintains a strong reserve level. Shares of the company are currently trading at $37.9 and are expected to go north of $43 by the end of 2012. Cliff Asness had the largest stake in CBSH among the 350+ hedge funds we are tracking.