3 Strong Banking Stocks To Buy For Gains In 2013

Includes: BAC, BNPQF, C, COF, JPM, WFC
by: IncomeHunter

A strong banking stock has consistently positive revenue growth and sufficient Tier 1 capital to withstand significant financial stress. Revenue growth comes from deposit and loan growth. Sufficient capital comes from efficient management of capital and an understanding, on management's part, where risk lies in the corporate balance sheet.

In mid-April, Wells Fargo (NYSE:WFC) reported strong performance. Its diluted earnings per common share rose 75 cents, or 11%, over the prior quarter, while its revenue rose 20%. The company also boasted strong deposit growth. Its average core checking and savings deposits were up $7.8 billion from prior quarter and core loan portfolios were up $984 million from December 31, 2011. Wells Fargo's capital position also improved, with its Tier 1 common equity under Basel I moving from $4.4 billion to $99.5 billion. The company's net charge offs declined as well, bringing its annualized charge off rate to its lowest level since 2007 - but the market was not impressed.

Wells Fargo opened on April 13 at $33.73 and never went higher than $33.87 that day. It closed at $32.84. Today, the stock is still hovering between $33 and $34 a share - its seems sort of anti-climatic after reporting performance like that.

So, what gives?

It's not like Wells Fargo does not have some good prospects. In the first quarter this year, the company inked an agreement with Grupo Elektra's Mexico-based Banco Azteca that will extend its consumer remittance payout network distribution to almost 2,500 locations in Mexico, Guatemala, Honduras and Peru. Wells Fargo is also in the process of acquiring the North American reserve-based lending business of BNP Paribas (OTCQX:BNPQF) and recently completed its acquisition of Burdale Financial Holdings Limited and the portfolio of Burdale Capital Finance from Bank of Ireland. In December, Wells Fargo announced an agreement to acquire global equity investment boutique EverKey.

One issue could be that the $176.55 billion market cap Wells Fargo is pursuing is a growth strategy that is significantly different from that of its peers. Rival Citigroup (NYSE:C) has a $102 billion market cap and is focused on organic growth. Revenues in the first quarter of 2012 grew 20% from the previous quarter. Bank of America (NYSE:BAC), which has a market cap of $95.89 billion, is also pursuing an organic growth strategy after growing largely through acquisitions last year. However, the bank experienced negative quarterly revenue growth of 17%. The $165.64 billion market cap JP Morgan (NYSE:JPM) is using an organic growth strategy as well. The bank saw revenue growth of 6% in the first quarter of 2012. Capital One (NYSE:COF) which is much smaller than many of its rivals (its market cap is just $24.76 billion), but up and coming, is using a mix of acquisitions and organic growth to fuel its expansion but that may be something of a necessity given its size. Capital One saw revenue growth of 22% in the first quarter of 2012.

Wells Fargo is also priced a bit higher than the competition. It recently traded at $33 a share with a forward price to earnings ratio of 9.15. In comparison, rival Bank of America is priced at just 8.42 times its forward earnings. Citigroup, Capital One and JP Morgan are priced even lower, with forward price to earnings ratios of 7.46, 7.83 and 7.88, respectively.

But, Wells Fargo has strong dividends and a high one-year target price to go with that modest premium. It is paying a yearly dividend of 88 cents (2.70% yield) and analysts are expecting it to reach $38.18 a share in the next year, making for a projected return of almost 17% over the next 12 months. Rival JP Morgan offers a modestly higher dividend, at $1.20 a share or 2.80% yield, and features more predicted upside. The company is trading at just over $43 a share with a one-year target estimate of almost $53 a share, making for over 24% predicted upside. Obviously, this looks a bit better than Wells Fargo, but Wells Fargo is still significantly better positioned than others in its peer group.

Citigroup recently traded at $35 a share with a one-year target estimate of just under $44 a share, making for a predicted upside of nearly 26%, but the company pays only 4 cents a year dividend (0.10% yield) and it failed the Fed's stress test. Bank of America did pass the stress test but it is opting not increase its dividends right now, leaving its dividend at 4 cents a year (0.50% yield). It has decent upside - the company is trading at just under $9 a share with a mean one-year target estimate of just under $10 a share, making its predicted upside just over 11%. Capital One pays a moderately higher dividend than Citigroup or Bank of America at 20 cents, but at its current trade price of $54 a share, that's a yield of just 0.40%.

Overall, I am a fan of JP Morgan. It has strong capital generation capabilities, even while pursuing an organic growth strategy, and it has a high tangible book value. I also like its aggressive stock repurchase program. It has already bought back $9 billion in stock and is set to repurchase a additional $15 billion in stock between this year and early next. I'm not sure how well it will do over the long term but over the next year or so I see lots of room for making money. I like Wells Fargo, but I think JP Morgan is more promising.

Bank of America is on my watch list. It is priced low at less than half of its book value. I like its strategy to postpone offering dividends. I think it is gutsy, intriguing and a good way to build up its position but I want to see whether that's where the extra capital actually goes before saying it is a buy. Capital One is also interesting. It is a finance company that is growing aggressively and I am anxious to see what happens next for the finance company. Citigroup is okay, but with its recent rejection of its compensation package I can't recommend becoming involved. Citigroup itself could be sued.

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