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From regulatory headwinds to liquidity issues and challenged fundamentals, the Street is currently bearish about Comerica (NYSE:CMA) and Regions Financial (NYSE:RF). These two stocks have nevertheless soared by 14.7% and 14.2%, respectively. While I am generally bullish on financials, I believe that the Street has this one right.

From a multiples perspective, both companies are fairly expensive for the industry. Comerica trades at a respective 13.8x and 13.3x past and forward earnings while offering a dividend yield of 1.4%. Regions trades at a respective 28.9x and 10.5x past and forward earnings while offering a dividend yield of 0.8%. Analysts are currently even more bullish about the latter, rating it nearer to a "sell" than anything else. The fact that the company is the only major bank that has taken this long to repay back TARP obligations underscores structural challenges.

At the fourth quarter earnings call, Comerica's CEO, Ralph Babb, noted a few relieving trends for his own firm:

We are pleased to see total loan growth of $1.5 billion or 4% on a period-end basis, which was driven by a $1.9 billion or 8% increase in Commercial loans, particularly in National Dealer Services, Mortgage Banker Finance, Energy Lending, Technology & Life Sciences and Global Corporate Banking. We had record deposits of $47.8 billion at year-end 2011, with an increase in period-end deposits of $303 million or 1% compared to the third quarter.

Net interest income of $444 million increased $21 million or 5% compared to the third quarter, primarily resulting from an increase in average earning assets of $2.4 billion.

Operating EPS of $0.60 was well ahead of Zacks consensus of $0.46. With NIM and loan growth being disappointing, the turnaround helped drive a 3.14% by the close of trading on Friday. About a month ago, management announced that it was resuming its buyback plan, who will boost the payout ratio to around 50%. The CCAR review, however, is concerning and will magnify short-term volatility.

Consensus estimates for Comerica's EPS forecast that it will grow by 135.2% to $2.07 and then by 7.2% and 18.9% in the following two years. Of the 8 revisions to EPS, 7 have fallen for a net change of -1%. Assuming a multiple of 15x and a conservative 2012 EPS of $2.14, the rough intrinsic value of the stock is $32.10, implying 8.5% upside. If the multiple were to decline to 12.5x and 2012 EPS turns out to be 7.2% below consensus, the stock would fall by 12.9%. This is not the most favorable risk/reward and, accordingly, I agree with the "hold" rating on the Street.

In regards to Regions, shareholders can finally say goodbye to Morgan Keegan. Regions recently sold the business to Raymond Jones for $930M and agreed to indemnify the buyer from litigation related to Morgan Keegan. Credit Suisse anticipates that Regions will raise $900M to help pay back some of the $3.5B worth of TARP debt. ROE is further trending towards 6.9% in 2012. As the company trades at a premium to peers while struggling with execution, I strongly advise staying on the sidelines.

Consensus estimates for Regions' EPS forecast that it will turn positive at $0.19 in 2011 and then grow by 152.6% and 43.8% in the following two years. Assuming a multiple of 13x and a conservative 2012 EPS of $0.44, the rough intrinsic value of the stock is $5.72, implying 16.5% upside.

Source: Why The Street Fears Comerica, Regions Financial