Large Cap Regional Banks Q4 Preview: BBT The Best Of All?

Regional banks' valuations

Large cap regional banks’ 2014 estimates are a little high and should expect to witness downward revisions post-4Q13 earnings, according to the latest research report from Citi.

Keith Horowitz and the analyst team at Citi Research pegged their estimates for the large cap regional banks 3% below consensus on average.

Relative valuations appear full at current levels

Citi analysts believe the regional banks currently trade at about 12x 2014 earnings or about 20% discount to the S&P 500 (INDEXSP:.INX) compared to their historical 26% discount. The following graphs highlight the analysts’ views:

Citi analysts anticipate 3% downside to 2014 consensus EPS estimates. Except for Wells Fargo, their 2014 estimates are below consensus for all their names. The analysts anticipate core PTPP down 1% on average across their universe in 2014. The analysts expect the most downside to estimates in PNC Financial Services Group Inc (NYSE:PNC) and Fifth Third Bancorp (NASDAQ:FITB).

The analysts expect 2014 EPS for PNC is $6.55 as against consensus of $6.94, as they believe expectations for both net interest income and free revenue appear to be too high. Similarly, the analysts view net interest income expectations as too high for Fifth Third Bancorp and estimate 2014 EPS at $1.65 against a consensus of $1.75.

Consensus estimates for large cap regional banks

The following table captures the Citi and consensus estimates for large cap regional banks:

4Q13 estimates

BBT – The pick among the lot

Keith Horowitz and the analyst team at Citi believe BB&T Corporation (NYSE:BBT) has the most upside as its above-average returns and solid management team should justify a premium multiple. The analysts believe among the regionals, BB&T Corporation remains the top idea as it is well-positioned for a tough environment given its diverse revenue mix and specialized lending business. Citi analysts believe BB&T Corporation’s valuation continues to be attractive as the analysts’ anticipate about 20% upside over the next 12 months.

Citi analysts also believe there could be some upside to loan growth estimates for 2014 for BB&T Corporation (NYSE:BBT).

However, the analysts are neutral on their other 5 names primarily due to the fact that they believe EPS estimates need to come down a bit.

Citi analysts anticipate a 2c beat against a consensus for lower expenses for Wells Fargo & Co (NYSE:WFC). The analysts anticipate Wells Fargo to report earnings of $1.00 largely due to lower compensation expense as mortgage banking-related comp continues to decline.

While analyzing USB, Citi analysts anticipate its stock to underperform post-earnings on 2c miss. The analysts’ 4Q13 estimate of $0.74 for U.S. Bancorp (NYSE:USB) is below consensus of $0.76 on higher expenses. Considering U.S. Bancorp (NYSE:USB)’s premium valuation, Citi analysts believe it will be challenging for USB’s stock to outperform.

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About the Author

Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports

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