Regional and Multinational Bank Stocks for 2014

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In our previous looks at big bank stocks going into the new year, the two that appear to be best positioned for growth were Citigroup Inc. (NYSE: C) and JPMorgan Chase & Co. (NYSE: JPM). The analysts at Sterne Agee have reached the same conclusion regarding big banks, and the analysts have also taken a closer look at regional and multinational banks.

Here’s their conclusion:

Asset-sensitive regional banks provided the catalyst for the sector’s outperformance in ’13. However, as we enter ’14, we see few catalysts to drive sector performance meaningfully higher as earnings expectations slow dramatically to a mid single-digit pace. No doubt, the operating environment remains challenging, but as the economy continues to grind forward, our sense is the banking sector stands to post further, albeit modest gains in ’14.

What is modest? In 2013 regional banks posted share price gains of 25% to 30% while the outlook for 2014 suggests gains more on the order of 7% to 13%. These more modest gains coupled with forward earnings multiples of between 15 and 17 don’t provide a lot of opportunities for investors to find a big score.

Sterne Agee’s top pick among regional banks is M&T Bank Corp. (NYSE: MTB). Sterne Agee cut its 2014 earnings per share (EPS) estimate on the Buy-rated bank from $8.20 to $7.90 and the 2015 estimate has been cut from $9.50 to $9.00. The bank’s fundamentals are strong and it continues to experience good organic lending growth. The consensus estimate on M&T shares from Thomson Reuters is around $121.20 yielding an implied gain of 6% based on Friday’s closing price of $114.34. The forward multiple is 13.86 based on the consensus estimate for 2014 EPS of $8.25. Based on the Sterne Agee estimate of $7.90, the forward P/E ratio is around 15.4. M&T’s 52-week range is $95.68 to $119.54.

PacWest Bancorp (NASDAQ: PACW) is a small cap regional bank that mainly serves southern California. A likely merger with CapitalSource Inc. (NYSE: CSE) enhances the outlook for the coming year, bringing the bank’s assets to more than $10 billion. The bank’s stock closed at $41.66 on Friday in a 52-week range of $24.27 to $42.69. Sterne Agee projects 2014 EPS of $2.80, up 43% compared with estimated 2013 earnings. The implied gain to the target price of $48.00 is about 15% and the forward P/E ratio is 14.9.

Among multinationals, Sterne Agee recommends three banks. The first is Puerto Rico’s Popular Inc. (NASDAQ: BPOP). The mid-cap bank’s stock closed at $28.21 on Friday in a 52-week range of $20.31 to $34.34. Based on Sterne Agee’s 2014 price target of $40.00, Popular has an upside potential of nearly 42% and a 2014 EPS estimate of $2.90. The investment firm’s forward multiple is just 9.6, below the Thomson Reuters consensus multiple of 10.3. Popular received TARP funds in 2009 and could repay the loan in the first quarter of next year, which will give the stock a shot in the arm as well.

First Bancorp (NYSE: FBP) is another Puerto Rican bank that gets the nod. The bank’s asset divestitures are behind it and, like M&T, it is fundamentally sound. Sterne Agee’s price target on the stock is $11.00, and the stock closed on Friday at $5.81 in a 52-week range of $4.27 to $8.70. The potential upside for this small cap bank is nearly 90%. The bank’s forward multiple according to the analysts is 10.8 and the consensus forward P/E from Thomson Reuters is 11.17. Sterne Agee’s EPS estimate for 2014 is $0.52.

The third recommended multinational is another Puerto Rican bank, OFG Bancorp (NYSE: OFG). A recent dividend increase could indicate a share buyback for next year. The bank raised its EPS guidance in every quarter of 2013. This small cap bank closed at $16.82 on Friday in a 52-week range of $12.86 to $19.33. The Sterne Agee price target on the stock is $23.00, yielding a potential upside of almost 79%. The EPS estimate for 2014 is $2.05 and the stock’s forward multiple for 2014 is a low 8.3 from the firm while the consensus multiple is 9.45.

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