Why Banking Stocks Are an Attractive Buy!

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

In 2013 getting into banking stocks will be a smart decision as the U.S. economy is undergoing strong recovery and the consistently declining jobless rates coupled with the rebounding housing nidustry are good indications of the growth prospects for the banking industry. Banks are valued below historical norms and the worst of the new financial regulations are already done. Well known analyst Dick Bove believes Bank earnings could hit a record $38 billion in the fourth quarter. He told in an interview to a private channel that "There's a good chance the fourth quarter of this year will be the highest earnings period ever in the history of the American banking industry," he said. "And when you take a look at the $38 billion relative to the $25 billion earned in the fourth quarter last year, it'll be a 50 percent increase." He's predicting that investors will flock back to the stocks next year as banks start returning more capital to shareholders. "Because the industry is massively overcapitalized and has an enormous amount of excess liquidity, the dividends will go up and the stock buyback programs will increase," he said.

JPMorgan Chase (NYSE: JPM)

On the back of an expanding mortgage business, improving customer credit profiles, improved investment banking conditions, and sharply lower credit costs, JPMorgan Chase released very strong fourth quarter 2012 earnings of $5.3 billion, or $1.39 per share. This was a gain of 53% from the $0.90 per share in earnings from the fourth quarter of 2011, and a full $0.20 above analysts' expectations for the quarter.

What went right? Nearly everything. For all of 2012, JPMorgan reported earnings available to common shareholders of $19.9 billion, or $5.20 per share, a 16% jump from 2011. JPMorgan is on pace to earn about $20 billion this year, and in the absence of share buybacks, has been able to put about $8 billion into its capital “bank” even after paying the $1.20 annual dividend on its 3.8 billion shares outstanding.  During the past fiscal year, JPMorgan increased its bottom line by earning $5.19 versus $4.47 in the prior year. This year, the market expects an improvement in earnings ($5.37 versus $5.19).

JPMorgan seems to be trading at a reasonable price-to-earnings ratio of 9.5. The stock's price and the company's overall culture seem to have fully recovered from the $6.2 billion London Whale trading debacle in the second quarter of 2012. Looking ahead, JPMorgan has a nice capital cushion with a Basil III ratio of 8.7%, and will undoubtedly be approved to continue buying stock and increase its dividend in the Fed's Stress Test, the results of which should be released next month.

M&T Bank (NYSE: MTB)

One of the biggest regional banks in the Mid-Atlantic is M&T Bank, which has over 700 branches. M&T had long been a top tier performing bank, with well controlled expenses and fewer credit issues than most of its peers. M&T had an excellent quarter, with earnings roughly doubling from the fourth quarter of 2011. Net income came to $296 million, or $2.16 per share, versus the $148 million, or $1.04 per share in the fourth quarter of 2011. For all of 2012, earnings came to a record $1.03 billion, or $7.54 per share. This was a 19% jump from the 2011 numbers. The stunning fourth quarter result, with its return on equity of 1.45%, was fueled by mortgage income and declining reserve provisions. Just as impressive is the ability of M&T to have a much smaller bite taken from its net interest spread than most of its competitors. The bank's 3.73% net interest margin was three basis points lower than the third quarter of 2012, but was even with the fourth quarter of 2011.

M&T will get a further lift in 2013 from its acquisition of Hudson City Bancorp (NASDAQ: HCBK), which should be by no later than the second quarter of 2013. The acquisition will increase M&T's loan portfolio by over $20 billion, and add some needed capital.  The deal will also assist the efficiency of M&T's marketing, given the population density in the new markets M&T will gain.

I like M&T a great deal over the next six to 12 months, at the very least. I believe it can maintain the recent earnings momentum with help from the Hudson City deal, and look for earnings up around $8.30 per share in 2013. I also expect a modest dividend increase early this year. With a quality, 2.7% yield, and reasonable trailing price to earnings ratio of 13, I see a short to intermediate term winner here in the banking sector. The stock’s beta is 0.6 with a dividend yield of nearly 3%, so it’s a good financial stock for defensive investors as well.

Somnath907 has no position in any stocks mentioned. The Motley Fool owns shares of JPMorgan Chase & Co.. 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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