Chris Quigley is a leading value investor and contributing editor to The Prudent Speculator. Here, he reviews several leading banking stocks in the wake of their recently reported quarterly earnings.
Shares of Bank of New York Mellon (BK) enjoyed a great week, rising 7.5% following the financial giant’s release of Q1 results. Adjusted earnings per share came in at $1.15, which was 19% better than investor expectations.
Assets under custody/administration reached a record $33.5 trillion, which benefited from net new business and the favorable impact of a weaker U.S. dollar. The company had $1.9 trillion directly under management at the end of Q1. During Q1, BK repurchased 11 million of its common shares for $644 million and paid $246 million in dividends.
We continue to like that BK is well capitalized and has a management team that is committed to cost containment and driving growth for the future. BK shares are currently trading at 13.0 times NTM adjusted earnings expectations. Our Target Price has been adjusted upward to $65.
Shares of Bank of America (BAC) were higher following a solid Q1 earnings release. The financial giant said that adjusted EPS came in at $0.62 versus analyst forecasts that called for $0.59. Q1 results saw modest growth in net interest income and moderate growth in average loans.
We were constructive on the firm’s non-interest income growth and controlled expenses during the period. BAC also showed continued good credit quality and further loan loss reserve release. The bank’s efficiency ratio improved to 60%, and capital ratios remain strong.
With many of the problems of the past decade seemingly in the rear-view mirror, BAC has numerous opportunities to capitalize, from its large deposit base and consumer lending franchise to its “thundering herd” of Merrill Lynch’s financial advisors and wealth managers.
We like that credit quality continues to improve, and while expenses are being controlled, BAC is investing in digital capabilities and enhancing the overall client experience. With the shares trading for just 11.4 times NTM estimated earnings, and the bottom line likely to benefit from higher interest rates, we think BAC is very attractive.
While shares currently yield just 1.6%, we expect the dividend rate to increase in the near term and for BAC to continue to buy back its common stock in the open market. Our Target Price for BAC has been lifted to $38.
Shares of regional bank Keycorp (KEY) ended the week up over 3% as interest rates started to inch up again and the company reported well-received Q1 financial results. KEY announced adjusted EPS of $0.38, which was in-line with consensus analyst estimates.
The bank benefited from a lower tax rate and growth in both non-interest income and net-interest income. Return on tangible common equity improved to 14.9% from 13.6% during the previous quarter.
We continue to like Keycorp and think that the Q1 results show directionally what we want to see, except for a bit higher expenses. That said, we were pleased to hear management say it was committed to hitting full-year 2018 expense targets.
We also believe that the bank’s efficiency can continue to improve as it benefits from the full integration of its recent acquisitions. Shares currently trade at 11.5 times NTM adjusted earnings expectations and carry a 2.1% dividend yield. Our Target Price has been bumped up to $27.
Shares of regional banking powerhouse BB&T Corp (BBT) rose, supported by what looked to be a breakout quarterly report and rising interest rates. Core Q1 EPS came in at $0.97, versus consensus Street estimates of $0.92.
While forward-looking loan growth remains challenged, we liked that the company delivered lower-than-expected expenses and management believes overall total revenue is promising for full-year 2018.
We like that BBT continues to experience a strong adoption rate of its customizable digital banking platform and we remain fans of the company’s relatively conservative loan underwriting and its efforts to diversify its revenue stream.
While shares are off to a good start (up more than 6%) in 2018, we see additional upside potential on the back of a solid economy, rising interest rates, cost controls and benefits from tax reform. BBT yields 2.5% and trades at 13 times NTM consensus earnings estimates. Our Target Price for BBT has been boosted to $64.
Shares of Fifth Third Bancorp (FITB) rallied more than 7% after reporting a solid Q1 earnings release. The Ohio-based bank posted adjusted earnings per share of $0.57, beating the average analyst estimate of $0.48 and the $0.37 of net income in the year-ago period.
Not shown in the adjusted numbers, FITB’s Q1 financials benefited from a revaluation of its Vantiv stake after it merged with Worldpay. Adjusted return on tangible equity and return on assets both improved during the quarter, climbing to 13.4% and 1.23%, respectively. Additionally, net-interest margin was 16 basis points higher than Q4 2017.
We believe FITB is a good regional banking name to own in a diversified equity portfolio. Shares are trading at less than 14 times forward earnings estimates and carry a dividend yield of 1.9% (though we expect the company to boost its payout in the next few quarters). Our Target Price has been boosted to $41.
Regional bank Old National Bancorp (ONB) saw its shares jump more than 4% after reporting Q1 financial results that saw EPS set a first quarter record and beat consensus analyst estimates by more than 16% ($0.34 versus $0.29). The company saw strength in commercial loans and cut non-interest expenses much more than investors were expecting.
We continue to like ONB and its regional focus on Indiana, Wisconsin, Kentucky and Michigan. While non-interest income compression was a drag in Q1, the company is working to improve this area as it efforts to diversify its revenue stream. We view Old National as a quality bank whose management balances a conservative culture with aspirations for growth.
ONB remains well capitalized and its shares currently yield 3%, while the forward P/E ratio is a very reasonable 13.5. Our Target Price for ONB has been increased to $23.
