CNBC recently had a roundtable discussion on the wisdom of purchasing some of the nation's leading banks. Among the winners in that discussion were JPMorgan Chase (JPM), Wells Fargo (WFC), Huntington Bancshares (HBAN) and Fifth Third Bancorp (FITB). These four banks are all over the map in terms of size, profitability, and in my view, prospects. So, lets take a look, especially at Huntington, which I have not looked at in detail recently, and the all-star performer among large banks, Wells Fargo, to see which are viable investments.
Huntington, a large $50-billion-plus midwestern bank, presented at the June 13, 2012 Morgan Stanley Financials Conference. In the first quarter of 2012, Huntington earned $153.3 million, or $0.17 per share. This was a 21% increase from the same quarter of last year, viewed from either the total or the per share. The return on assets rose to an annualized 1.13%, the first quarter in excess of 1 percent since pre-recessionary times. But considering all factors, it was not a particularly impressive quarter, especially compared to other regional banks.
The loan portfolio, which for many successful regional banks such as U.S. Bancorp (USB) and Fifth Third increased sharply in the first quarter, barely budged at Huntington. It rose by less than 3% from the first quarter of 2011, and actually fell by about one percent from the fourth quarter of 2011. Part of the reason for the decline was the bank packaged and sold for $1.3 billion in automobile loans, but given the larger, national banks are mostly shrinking their loan portfolios, it is disappointing Huntington could not take advantage of the opportunity to grow its portfolio more aggressively.
The profit improvement is traceable to a handful of things that are not necessarily repeatable. First, as its credit metrics continued to improve, it was able to reduce its provision for loan losses by about $15 million, or by 30%, from the first quarter of 2011. Next, its credit costs fell as short term interest rates fell. In Huntington's case, credit costs were down by $35 million compared with a year earlier. Due to the low interest rate environment, many individuals are refinancing their mortgages, and Huntington experienced a more than doubling of mortgage fee income, up by $24 million to $46 million. Huntington gained $11.6 million from making an FDIC assisted acquisition of Fidelity Bank (Michigan).
Non-interest expenses also increased along with the gains in revenues. What is troubling there is many of these revenue enhancements will not be repeated going forward, while most of the expenses will be ongoing. Huntington's efficiency rate was between 62% and 65% each quarter of last year, and ended the first quarter of 2012 at an efficiency rate of 63.8%. The bank would be well served to drive down its non-interest expenses going forward.
The many (over 25) analysts who follow Huntington do not see much profit growth potential. The five-year projection is under 5% annually, driving the PEG up to 2.03, among the highest of any bank I have covered. Given that much of the earnings gains in the first quarter were brought on by one-time factors, earnings the next few quarters are likely to be less than what was earned in the first quarter. It is not hard to find regional banks with more earnings growth potential, lower PEGs, and a dividend yield similar to Huntington's 2.6%. I would not buy Huntington at this point.
Wells Fargo is the nation's largest "consumer oriented" bank, and fourth largest bank overall. Its geographic footprint extends coast to coast. It became a national player in the banking industry by picking up Southeastern banking giant Wachovia on the cheap in 2008. Even before the deal closed, Wells Fargo got ahead of the Wachovia loan book by notifying the world it was writing off nearly 20% of Wachovia's loan portfolio. But, by cleaning up the acquired assets, the acquisition will go down as the most successful of the deals made in the depth of the banking crisis.
By giving Wells Fargo a hub in the Southeast to compliment the historically San Francisco based bank, Wells Fargo ensured it would not be vulnerable to regional issues. And since that purchase, Wells Fargo has been the most consistent of the country's $1 trillion banks, consistently earning profits in excess of 1.0% of assets, having reasonable expenses, and posting consistent growth while its peers were shrinking their balance sheets. In the first quarter of 2012, average loans were $14.5 billion higher than the year ago quarter.
Wells Fargo writes nearly 33% of this nation's new home mortgage loans, and has major positions in automobile loans, credit cards, and most other consumer loans. It virtually invented the idea of cross selling in a banking context, and each new mortgage customer is now likely to become a credit card customer as well.
The downside of all this exposure to the domestic mortgage market is if interest rates were to spike, and funding costs were to rise sharply, then Wells Fargo would get squeezed. But it is hard to see interest rates spiking anytime in the next two to three years, at a minimum.
Wells Fargo is the growth stock among large banking issues. A year ago, analysts saw second quarter earnings at $0.70 per share. Now they see it at $0.81 per share. The 2012 earnings are forecast at $3.28 per share, which would be a 16% jump from 2011. I see Wells Fargo's profits growing at that roughly 15% clip for several more years after that. The five-year PEG is a 0.90, which, while not cheap for a bank, is cheap for a company of Wells Fargo's stature. I recommend it without hesitation.