(By Mani) Another four years with Obama, a new Democrat in the Senate and even the Bieber/ Selena Gomez break-up do not change the view that 2013 and 2014 will be challenging years for earnings at regional and small banks, especially if mortgage origination volume slows.
Roughly one-third of these companies are expected to have negative EPS growth in 2013, with reserve releasing coming to an end, asset yields compressing and recent loan volume slowing.
As the fiscal cliff looming and the ongoing depressing economic signals from Europe dominating the financial headlines, it would be difficult for the loan demand to accelerate.
"While we don't view the sector as necessarily overvalued, we see the potential for lower core earnings and profitability over the near term, thus limiting multiple expansion," Oppenheimer analyst Terry McEvoy wrote in a note to clients.
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Year-to-date, the S&P regional bank index is up 14.4 percent and has outperformed the S&P 500's 9.7 percent growth.
Analysts' fundamental concern in recent quarters centering on net interest margin (NIM) compression, while they feel more comfortable with consensus expectations at the largest 25 regional banks, which are currently assuming an average 15 basis points (bps) drop from the third quarter average of 3.54 percent to 3.39 percent in fiscal 2013.
In addition, the loan growth forecasts may be aggressive at about 8 percent growth expected over the next five quarters in light of the slowing economic conditions. Consensus GDP growth for the fourth quarter is currently 1.8 percent and 2 percent in fiscal 2013.
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"Historically, core loan trends, especially commercial, have tracked GDP growth," the analyst wrote.
Moreover, the re-election of President Obama as well as Elizabeth Warren's move into the Senate may not have set well with many regional and small-bank CEOs as regulatory changes across the industry have added expenses and reduced revenue.
"This could pressure boards to throw in the towel and sell out, especially if the Fed's view on interest rates persists," McEvoy noted.
Regional banks with more than $50 billion in assets trade at 1.3x tangible book and at 10.3x estimated 2013 EPS while regional banks with between $12 billion and $50 billion in assets trade at 1.5x and 13.0x, respectively.
"Our top picks today would be PNC Financial (attractive valuation with positive EPS growth next year) and both SunTrust (NYSE:STI) and Comerica (trading at or below tangible book value, or TBV)," McEvoy added.