3 Regional Banks Analysts Favor

|
 |  Includes: FITB, PNC, STI
by: Bidness Etc

Among U.S. regional banks, SunTrust Bank (NYSE:STI), PNC Financial Services (NYSE:PNC) and Fifth Third Bancorp (NASDAQ:FITB) are the favorites of sell-side analysts. Though we are not big fans of crowded trades, however, in this case we think these banks have an upside because of a recovery in housing markets, as well as improving credit conditions. In this article, we will discuss why analysts favor these banks.

SunTrust Bank

The bank provides a complete range of financial products, and enjoys a strong market share in Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee and Virginia. The bank has a history of surprising The Street by posting EPS figures above that of what analysts had expected. The table below summarizes how, on average, both the earnings and revenues of the bank surpassed estimates by 12.5% and 0.2%, respectively. Though the average revenue beat is not significant, the bottom line has been exceeding its consensus estimate on a regular basis.

Click to enlarge

Analysts have a Buy rating for the stock with a mean recommendation of 2.4 on Yahoo Finance, and a consensus price target of $30. Since the stock is currently trading at $28.26, this means it is an upside of 6%.

The stock has recently been upgraded by most of the major analysts and brokers. JPMorgan (NYSE:JPM) upgraded the stock on September 9, 2012, from Neutral to Overweight. Similarly, Morgan Stanley (NYSE:MS) upgraded the stock from Equalweight to Overweight. Wells Fargo (NYSE:WFC) also upgraded the stock rating to Outperform. Currently, the stock is being covered by 36 analysts, of whom 21 recommend the stock to their investors with either a Buy or a Strong Buy rating.

Going forward, we believe the bank will benefit from the recovering U.S. housing markets and cost cutting. On a recovery of the housing markets, the bank is expected to benefit from a decline in mortgage related net charge-offs. Continuing its cost cutting initiatives, the bank has recently announced the outsourcing of its fraud detection work. Where this move has raised security concerns, it will lead to the elimination of around 20 high tech jobs.

PNC Financial Services

PNC Financial operates as a large diversified financial services provider in the U.S., with a major market share in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, Kentucky, Florida, Washington, D.C., Delaware, Virginia, Missouri, Wisconsin and Georgia. The following table represents a summary of the earnings surprises that the bank has given the past 5 quarters. On average, the bank posted an 11.6% positive surprise each quarter over the past five quarters.

Click to enlarge

Analysts have a Buy rating for the stock with a mean recommendation of 2.1 on Yahoo Finance, one being a Strong Buy. The mean consensus price target for the stock is $71.25. Since the stock is currently trading at $63.83, this means it is an upside of 11.6%.

JPMorgan on September 28, 2012, boosted its price target for PNC from $78 to $80. They currently have an Overweight rating for the stock. Multiple drivers of growth in the top line and attractive valuations were associated to be the reasons for a price target boost. Reiterating their Outperform rating, Wells Fargo, in a research note to its investors, has also recommended PNC Financial. Analysts at Atlantic Securities and Oppenheimer have reiterated and upgraded their ratings for the stock. Currently, the stock is being covered by 33 analysts, of whom 21 recommend the stock to their investors with either a buy or a strong buy rating.

Going forward, we believe the bank will continue to benefit from its acquisition of Royal Bank of Canada's U.S. bank franchise, and Nat City. These acquisitions have enhanced the bank's already vast geographical footprint in the U.S.

Fifth Third Bancorp

Fifth Third Bancorp operates as a U.S. regional bank providing complete financial services to the Midwestern regions of the country. The following table shows how the bank has been able to exceed its earnings estimates on a regular basis. Except for the fourth quarter of the current year, the company exceeded all earnings estimates. Over the past 5 quarters, the bank gave a positive quarterly earnings surprise of 8.6%. The average quarterly revenue surprise remained insignificant; however, in the most recent quarter, the company generated a turnover that was 1% above consensus estimates.

Click to enlarge

Analysts have a buy rating for the stock, with a mean recommendation of 2.1 on Yahoo Finance, and a consensus price target of $16.79. Since the stock is currently trading at $15.49, this means an upside of 8.4%.

The stock was upgraded to buy from neutral on August 23, 2012 by Compass Point. Compass Point has a target price of $17 for the stock. Before that, analysts at Wells Fargo and Deutsche Bank (NYSE:DB) upgraded the bank to buy. Citigroup (NYSE:C) also upgraded its price target for FITB from $15 to $16. JPMorgan was forced to raise its price target for the bank's stock to $18. It said the improving credit outlook positively affected the earnings drivers. Currently, the stock is being covered by 31 analysts, of whom 20 recommend the stock to their investors with either a buy or a strong buy rating.

Going forward, we believe the bank's EPS growth will moderately benefit from a growth in its loans portfolio.

Valuations

The stocks of SunTrust Bank, PNC Financials and Fifth Third Bancorp trade at P/B multiples of 0.75 times, 0.91 times and 1.06 times.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Financials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.