Regional banks (KRE +2%) are the day's strongest performers - sailing through today's big rise in interest rates the way they cruised through June's increase. Interest rate margins are on the rise, economic growth should help sluggish loan volume, and the idea new bank capital rules will go easier on them than the TBTFs all factor in. Huntington (HBAN +2.9%), Regions (RF +1.8%), BB&T (BBT +1.9%), PNC (PNC +2.2%), Hudson City (HCBK +1.5%), Fifth Third (FITB +1.6%), SunTrust (STI +3.5%), KeyCorp (KEY +3%), Zions (ZION +3.5%), Comerica (CMA +2.7%), Popular (BPOP +1.2%).
The results of the first-ever "mid-cycle" stress tests of the big banks are due Friday. Unlike the Fed exams completed in March, these tests are self-administered and based on scenarios of the banks' own choosing. Will any fail themselves? Worth watching are BB&T (BBT) and Ally Financial - both of whom failed the Fed test. Others required to submit: GS, JPM, BAC, BK, AXP, COF, C, FITB, MS, PNC, RF, STT, STI, USB, WFC.
JPMorgan (JPM), PNC Financial, and U.S. Bancorp (USB) all have the earnings power to have grown book value in Q2 despite price declines in their securities portfolios due to rising interest rates, says Credit Suisse. Wells Fargo (WFC) could take the biggest hit, says the team, due to the relatively long 3.5 year duration of its portfolio.
The proposed doubling of bank (XLF) minimum leverage ratios to 6% isn't a big deal, says Credit Suisse, noting COF, WFC, PNC, and UBS are already above that level. The three with the lowest current levels (4.6% to 5.1%) - C, JPM, BAC - wouldn't have an issue getting to 6% if necessary. CS also notes the likelihood it won't be 6%, but instead a number well underneath.
The Fed's been continually over-optimistic about the economy throughout the recovery, says Sterne Agee and this time may prove no different. Expecting rates to retreat, the team spies opportunity in a basket of 4 large cap banks - C, JPM, USB, and WFC - as well as a group of regionals: PNC, MTB, RF, KEY. MTB is especially attractive given the roadblock now removed from its Hudson City (HCBK) purchase. A couple of smaller names of interest are First BanCorp (FBP) and PacWest (PACW) following the closing of its First California purchase.
Mostly in the green along with the life insurers today is much of the regional banking sector (KRE +0.5%) as a steeper yield curve is sure to boost their barely visible net interest margins. U.S. Bancorp (USB +0.1%), Huntington (HBAN +2.2%), New York Community (NYCB -0.1%), Regions (RF +0.7%), BB&T (BBT +1.2%), PNC (PNC +0.7%), SunTrust (STI +0.7%), KeyCorp (KEY +1.5%), People's Untied (PBCT +1.3%), Zions (ZION +1.9%), Comerica (CMA +1%).
Should PNC unload its 21% stake in BlackRock (BLK) - currently worth $9.46B, but on the books at $5.6B (PNC's total market cap is $37.5B). A sale would enable a sizable buyback (subject to Fed approval), but "not a great trade-off vs. losing 14% of EPS," says Nomura's Keith Murray. Another issue the buildup of a deferred tax asset, meaning the bank would be liable for a $1.9B payment to the IRS if it sold.
Large-cap banks are poised for multiple expansion, says Sterne Agee, as discussions with managements along with data points from recent investor presentations suggest business in Q2 is doing better than expectations. The team is recommending a basket of C, JPM, MS, and GS. In a similar vein, they like a basket of "discounted regionals" - PNC, MTB, RF, USB, and STI.
"The tank doesn't look empty yet," says Bernstein's John McDonald, speaking about the trend of bank profits benefitting from releases of loss reserves. It is fading though, he allows, and likely to account for about 10% of profit at large and mid-cap banks this year and 1% next year vs. 22% in 2012. At the top of the list of those benefitting sits Bank of America (BAC). Also: Synovus Financial (SNV), Citigroup (C), and PNC.
"Our origination performance didn't meet our expectations," said PNC CEO-elect Bill Demchak on the earnings call (transcript) - a familiar tune for the banks as the fast money from the refinance boom ends. One year since the RBC branch acquisition, PNC is moving quickly to build its Southeast franchise - its loan book growing at a 20% annualized rate in Q1, despite the runoff in noncore loans acquired (presentation slides). In a banking sector lit up bright red, PNC is flat. (earnings)
More on PNC Financial (PNC) Q1 earnings: Net interest income of $2.4B, up 4% YU/Y. Noninterest income of $1.6B up 9% Y/Y. NIM of 3.81% vs. 3.9% a year ago. Mortgage banking revenue of $238M off 6% Q/Q, off 9% Y/Y. Asset management income up 2% Q/Q, up 8% Y/Y. Provision for credit losses declines $82M Q/Q to $236M. Tier 1 Capital Ratio of 9.8%. Book value/share of $68.23, up from $67.05 in Q4, $63.26 a year ago. (PR)
PNC Financial Services Group Inc is a financial services company. It operates in six segments: Retail Banking; Corporate & Institutional Banking; Asset Management Group; Residential Mortgage Banking; BlackRock; and Non-Strategic Assets Portfolio.