2 Recent Banking Upgrades Investors Should Consider

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Includes: BNS, PROV
by: Matt Schilling

Over the last two days there have been 2 banking sector upgrades. Potential investors should consider these stocks based on their recent performance as well as due to their potential upside as well. In this article I will focus on the recent upgrades of Provident Financial Holdings (NASDAQ:PROV), and The Bank of Nova Scotia (NYSE:BNS).

Provident Financial Holdings trades in a 52-week range of $7.92 (52-week low) and $12.79 (52-week high), and opened trading at $12.65/share on Wednesday as the company was upgraded by Raymond James to an Outperform rating from a previous rating of Market Perform. It should be noted that Raymond James also has a $14.00/share price target on the stock. In my opinion there are three positive variables to consider when screening PROV. The first variable is the company's margins, over the last 12 months PROV has demonstrated a profit margin of 14.59% and an operating margin of 27.04%. In my opinion those numbers are pretty considering Bank of America (NYSE:BAC) only demonstrated a profit margin of 13.03% and an operating margin of 24.78%.

The second variable to consider is the company's recent EPS trends. Over the last four quarters the company has surpassed estimates twice, been in-line one, and demonstrated a miss during the December 2011 quarter. The last two quarters (March 2012 & June 2012) have seen PROV surpass estimates by an average 39.60%, due largely in part to an increase in both Net Income (105%) and Core Deposits (9%) during the second quarter. The last variable to consider is the company's quarterly dividend which was recently increased 25% to $0.05/share from $0.04/share.

The Bank of Nova Scotia trades in a 52-week range of $45.79 (52-week low) and $57.57 (52-week high), and opened trading at $52.87/share on Wednesday after the company was upgraded by Barclays Capital to an Equal Weight rating from a previous rating of Under Weight.

There are two variables potential investors should consider in terms of BNS. As was the case with PROV the first variable to consider are BNS's margins. Over the last 12 months The Bank of Nova Scotia has demonstrated profit margins of 30.80% and operating margins 40.51%, which is clearly better than that of their US counterpart JP Morgan Chase (NYSE:JPM) who has demonstrated profit margins of 20.33% and 34.40% over the same period.

The second variable to consider is the company's total debt to total cash ratio, which is 0.412 over the last 12 months which certainly a positive catalyst from a fundamental standpoint.

Final Analysis

Potential investors considering a position in both financial institutions should do so from a fundamental and growth standpoint. In addition to the primary angles and variables that I've highlighted there is a slight income angle to also consider as Provident Financial currently yields 1.6% ($0.20) and The Bank of Nova Scotia currently yields 4.20% ($2.16). I'd remain conservative in my philosophy before establishing a position and consider adding to that position if either company surpasses estimates or declares an additional dividend.

Disclosure: I am long JPM, BNS.