4 Banks Making Headlines: Should You Buy In?

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Our economy is dependent on a healthy banking system. By many measures, especially capitalization, banks are healthier today than at any time in recent memory. But each bank sits in a unique situation relative to its particular history, culture, geography and size. I am going to look at a few leading banks today, with a focus on the Midwest.

Adjusting to the new normal

Huntington Bancshares (NASDAQ: HBAN) is among the Midwest’s largest banks, with about $57 billion in assets and 700 offices, all in the lower Midwest region extending from Michigan in the north to Kentucky and West Virginia in the south. After getting hit hard late last decade and seeing its book value fall by 67% over the past five years, plus seeing its stock price sink to $1.00 per share 2009, the bank is certainly recovering well.

The bank has in fact recovered well enough to post recent earnings in excess of a 1.0% return on its assets. The first quarter of 2013 was no different, as the company's $151.8 million in profits for the first quarter represented a 1.1% return on assets. All is not rainbows however, as due to some one-time factors such as a $1.0 billion gain on the sale of an auto-loan portfolio late last year, it is unlikely that Huntington can meet, let alone beat, last year's earnings in 2013.

At a Sanford Bernstein Conference on May 29, management reminded us that in 2010, the bank had set upon long-term goals of returns on equity of 1.1% to 1.3%, efficiency ratio's in the mid-50% range, non-interest revenue of at least 40% total revenue, and net interest margins of between 3.3% and 3.7%. In the first quarter, the return on equity squeaked by, as did the net interest margin at 3.4%. But non-interest income was just 37% of total income, and the efficiency ratio was 63.3%, so it is obvious in what directions the bank's efforts will look going forward.

Another emphasis for the bank going forward is doing what it can to emulate the success of a bank like Wells Fargo and its vaunted cross-sell program. Huntington wants to make its customers more “sticky”, and the best way to do so is entangle customers into multiple accounts and loans. Huntington now averages about four accounts per customer, whereas Wells Fargo is closer to six per customer.

I see earnings at Huntington being sluggish this year and next, before potentially picking up strongly with the economy in 2015. I don't see the company doing any better than the general market for the next 18 months or so.

Citigroup – A top choice for the risk-tolerant investor

Oddly to me, my favorite money-center bank has been in the news the past few days. Citigroup (NYSE: C), according to analyst Charles Peabody of Portales Partners cited in a Bloomberg article, stands to lose up to $7 billion on negative currency swings this year. Any such loss under accounting rules would not depress earnings but would rather be debited against the big bank's book value. That value was nearly $19 billion at the end of the first quarter, of which about $16 billion, or $52 per share, was tangible.

Peabody has a history of pessimism, and Citigroup, which had been on quite a roll for the past 18 months on a cleaned up balance sheet and some indications of retreating from some of the excesses of prior management. New CEO Michael Corbat has stated a desire to reign in some of the company's vast international scope and focus its resources more on key markets.

Elsewhere, Citigroup settled for $730 million a big class action suit filed on behalf of preferred shareholders who bought their securities from 2006 to 2008. In all, it is likely that by the middle of this decade the bank will be earning what it was earning in pre-recessionary years. I see annual earnings growth in the mid-teens annually, and on a risk adjusted basis, see this as the best bet in the money- center bank category, and among the best choices for all banks of more than $50 billion in assets for the three-to-five year period ahead of us.

Earnings exploding after a troubled 2012

Another intriguing play right now is PNC Financial Services (NYSE: PNC). While regarded as a regional bank, it actually now the sixth-largest bank in the country by assets. It spent much of 2012 dealing with government agency claims for soured mortgages late last decade, most of which were written by City National Bank, which was subsequently acquired by PNC. Seemingly, each quarter of last year involved another special reserve addition to cope with the agency claims. With most of that behind it, City National fully integrated, and most of 2012's integration of the domestic branches of Royal Bank of Canada's, PNC should be in for a smoother ride going forward.

At a late May Barclay's London Conference, management dwelt upon the strengths of the bank, which now holds reasonable market share in nearly all large markets east of the Mississippi River. Due to a larger loan portfolio because of the acquired banks, along with costs that can be pruned through the Royal Bank acquisition, PNC is set to have a banner year.

In the first quarter it earned $1 billion, a 40% jump from the same quarter of 2011. Due to some share dilution, earnings per share “only” jumped 22% to $1.76 per share. I see this year's earnings at about $7.00 per share, which would be a 30% jump from 2012. With a rising dividend, a solid balance sheet, and proven management, PNC is a winner for conservative bank investors.

FirstMerit – Will it benefit from its recent large acquisition?

Akron, Ohio-based FirstMerit (NASDAQ: FMER) is another bank I am looking at. The primary reason is the bank recently grew by about 50% in asset size with the acquisition of Flint, Mich.-based Citizen's Bank. FirstMerit has historically been a conservatively run bank, hence it never had a losing year in last decade's recession. The culture clash between it and the high flying but troubled Citizen's will be something to watch. In announcing the merger, FirstMerit's management predicted that the deal would be 7.5% accretive to earnings by 2014. In 2013, the costs from the merger will cancel any accretive earnings.

FirstMerit was not the most profitable of banks before, during or after the recession, and adding Citizen's portfolio, in my opinion, will not add substantial growth to earnings. I see FirstMerit as a solid dividend play with its 3.6% yield, but otherwise, nothing exciting here for investors.

Conclusion

Of the four banks I have looked at today, I like Citigroup for growth and PNC for growth and income. I see both Huntington and FirstMerit as treading water with the market over the next year or two, and investors should look for more than that.

The big banks may be rushing to renew their focus on traditional banking, but well-run regional banks like PNC Financial are already there. PNC saw its share of hardships during the financial meltdown, but its management team thinks the bank is now back on track and ready to deliver for investors. Does this mean it's time to buy PNC? To help you figure that out, one of The Motley Fool's top banking analysts has authored a brand-new premium research report, delving into everything investors need to know about PNC today. To claim your copy, simply click here now for instant access.


Bill Edson has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup Inc , FirstMerit, Huntington Bancshares, and PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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