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Morgan Stanley (NYSE: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 is going to triple.

We will discuss the stocks in four articles. This is the third of four articles (see part 1, part 2):

Huntingdon Bancshares (NASDAQ:HBAN) has been given an overweight rating by Morgan Stanley (MS) because it is trying to address its credit problems as well as improving its pre-provision earnings. MS expects the provision expense to remain high due to the uncertain economic growth, despite management expectations of declines. With the expansion into New England, Wisconsin, and Minnesota, loan growth has seen an increase of 4.9%. Fee revenues of $15.5 million were generated thanks to Huntingdon’s auto loan securitization program, coupled with the sale of $1 billion worth of loans. Tier 1 capital for the bank is 10.2%. Net interest income is likely to see a slight increase, with an expected decrease in fee income. Shares of the company are currently trading at $5.4 and are expected to go north of $8 per share by the end of 2012.

KeyCorp (NYSE:KEY) has been given an equal-weight rating by Morgan Stanley. The average loan growth for KeyCorp is expected to turn positive in 2012, and a growth of 2.6% expected in 2013. It has a Tier 1 capital ratio of 11.3%. Morgan Stanley estimates that the company has almost $2.1 billion in excess capital which it will use for its de novo expansion. KeyCorp will target expansion into areas where there is weaker market share. The company’s net interest margin of 3.09% is below the industry median of 3.51%. Also, its efficiency ratio of 68% is higher than the industry median of 61%. Shares of the company are currently trading at $7.6 and are expected to reach $9 by the end of next year. Ken Griffin’s Citadel Investment Group had $124 million in KEY at the end of September.

M&T Bank Corporation (NYSE:MTB) has strong earnings power but it has been given an equal-weight rating by Morgan Stanley. Morgan Stanley expects loan growth for the company to be below its peers. Net interest margin has seen a decline due to excessive liquidity. Asset repricing is likely to drive yields lower. The company acquired Wilmington Trust which strengthened its mid-Atlantic density, increased scale in wealth management and trust, and resulted in fee revenue growth. The management is looking to decrease costs and increase efficiency and profitability. Shares of the company are currently trading at $75.8 and are expected to go north of $90 by the end of 2012.

New York Community Bancorp (NYB) has been given an equal-weight rating by Morgan Stanley. Its core loan growth has increased over the last year due to significant CRE lending and greater activity in New York City’s rent-controlled market. High competitiveness and low long-term rates have kept the company’s margins under pressure. Mortgage banking income, despite being volatile, has doubled in the last quarter to $24 million. New York Community Bancorp’s conservative underwriting practice has kept charge-offs relatively low. Morgan Stanley thinks that the company has excess capital to support loan growth, while maintaining dividends at the current level. Since 2000, it has completed ten acquisitions. Shares of the company are currently trading at $12 and are expected to reach $16 by the end of next year. Value investor Irving Kahn had $43 million invested in NYB at the end of the third quarter.

People’s United Financial (NASDAQ:PBCT) has a solid capital position with clear strategies in mind. It has been given an equal-weight rating by Morgan Stanley. Its return-on-assets is likely to exceed its peers by 2013. The company has a target efficiency ratio of 55% by mid-2013 and it currently has a high dividend payout ratio of 104%. Net interest margin, 4.11%, is higher than its peers but is expected to decline slightly. People’s United Financial recently repurchased 15.8 million shares and is expected to repurchase another 18 million shares. Shares of the company are currently trading at $12.7 and are expected to rise to $15 by the end of next year.

Popular (NASDAQ:BPOP) has been given an overweight rating by Morgan Stanley. The company is looking to solve its credit problems by keeping an eye on commercial loans. It has a Tier 1 capital ratio of 12% and has managed to raise $1.7 billion worth of capital last year. Morgan Stanley believes that the company has enough capital to even withstand adverse conditions, without a need to raise additional equity. There have been a few positive developments in Puerto Rico, such as the introduction of housing incentives by the government, tax reforms, and engagement of the government in public-private sector investment partnerships. Since Popular is the dominant franchise in Puerto Rico, it is looking to benefit from these improving conditions. Shares of the company are currently trading at $1.3 and are expected to reach $3.5 by the end of 2012. John Paulson had $100 million invested in BPOP at the end of September (see John Paulson’s portfolio).

Prosperity Bancshares (PRSP) is a highly profitable bank that has been given an equal-weight rating by Morgan Stanley. The bank has announced that it aims to increase loan balances by $1 billion. Its total loans have increased by $324 million over the last year, making it one of the strongest midcap banks in terms of loan growth. Also, it has a relatively low loan to deposit ratio of 48%. Its net interest margin fell over the last quarter due to lower loan and security yields. Tier 1 capital for Prosperity stands at 13.5% and is above its peers. Return on asset of 1.4% is expected by the end of next year. Prosperity has taken part in 23 acquisitions since 2000. Shares of the company are currently trading at $40 and are expected to rise to $45 by the end of next year.



Disclosure: I am long MS.

Source: Best Banking Stocks With No Exposure To Europe, Part 3