Regional banks’ stocks have gained in tune with market trends, while their EPS estimates, on average, remained unchanged.
Josh Levin of Citi Research, in a recent research report, analyzed the 3Q13 earnings of regional banks and points out how their 2014 and 2015 consensus EPS estimates have changed after the earnings season.
Closer look into internals
Citi analyst points out how internals of consensus estimates comprising NII, fees, non-interest expenses and provision changes have changed and their effect on the revised estimates.
For instance, the analyst points out 2014 downward revenue revisions were offset by lower provisions made by the regional banks. Levin notes that all banks across Citi’s regional banks coverage benefited from lower provision expense estimates except for Huntington Bancshares Incorporated (NASDAQ:HBAN) and First Niagara Financial Group Inc. (NASDAQ:FNFG).
Regional banks revenue estimates
Josh Levin points out 2014 consensus revenue estimates comprising NII and fees were revised down about 1.2% on average, though only SIVB enjoyed positive revision of 3.4%. However, Zions Bancorporation (NASDAQ:ZION), First Horizon National Corporation (NYSE:FHN) and SunTrust Banks, Inc. (NYSE:STI) posted the largest negative revenue revisions ranging from 2.9% to 3.8%.
Similarly, 2014 consensus forecast for non-interest expense was revised down by about 0.5% on average across the regional bank space. However, SVB Financial Group (NASDAQ:SIVB) and Regions Financial Corporation (NYSE:RF) were the notable exceptions as they experienced upward expense revisions.
The Citi analyst notes that across the regional bank space, 2014 consensus headline EPS estimate revisions were flattish. However, there was a fair amount of dispersion in the revisions. While considering Citi’s regional banks coverage universe, the analyst notes the largest positive EPS revisions were shown by KeyCorp (NYSE:KEY) at 3.5%, followed by SVB Financial Group (NASDAQ:SIVB) and Comerica Incorporated (NYSE:CMA) at 3.2% and 2.6% respectively. However, First Horizon National Corporation (NYSE:FHN), Regions Financial Corporation (NYSE:RF) and Zions Bancorporation (NASDAQ:ZION) experienced the largest negative revisions of between 2.6% and 7.0%. These are evident from the following table:
2015 mirrors 2014
Josh Levin of Citi Research notes that in 2015 too, regional banks’ consensus headline EPS estimate revisions were flattish. Similarly the consensus revenue estimates for 2015 were revised down by about 1.4% on an average, while the consensus forecast non-interest expense was revised down by about 0.6%. All the regional banks in Citi’s coverage benefited from lower provision expense estimates except for Huntington Bancshares Incorporated (NASDAQ:HBAN).
Citi analyst Levin believes the Street may be stretching the most on RF, First Horizon National Corporation (NYSE:FHN) and KeyCorp (NYSE:KEY). For instance, Regions Financial Corporation (NYSE:RF)’s 2015 headline EPS estimate declined only ~$0.01, though the change in the provision expense estimate contributed positive ~$0.04 to RF’s new EPS estimate.
Citi analysts conclude from the third quarter earnings season that while headline 2014 and 2015 EPS estimates are, on average, unchanged across the regional bank space, consensus estimates for core earnings are down ~3% each year. However, the stocks on average were up ~3.5% in line with broad market trends. This reinforces the analyst’s view that P/E multiples expanded on lower quality estimates.