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Housing Recovery Bodes Well for Banks

 November 29, 2012 10:39 AM

(By Mani) S&P/Case-Shiller's September Home Price Indices revealed that the Western markets showed the most improvement with Las Vegas and Phoenix leading all metro-statistical areas (MSAs) over the past two months.

Separate from the S&P/Case-Shiller Index, the National Association of Realtors released existing home sales and starts data last week. Overall housing sales data has been mostly positive with sales up and average inventory months supply down while the average sales price has declined.

These housing data bodes well for the regional banking stocks, with City National Corp. (NYSE: CYN), Comerica, Inc. (NYSE: CMA) and Zions Bancorp (NASDAQ: ZION) having the largest exposure to the top 5 MSAs for the time period.

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Wintrust Financial Corp. (NASDAQ: WTFC), FirstMerit Corp. (NASDAQ: FMER), and TCF Financial Corp. (NYSE: TCB) had the largest franchise presence within the bottom five MSAs for September.

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However, several of the related MSAs have previously posted solid recoveries, and all MSAs showed improvement over the period

"Generally speaking, Western banks and Midwest banks have led the month-to-month and year-to-year rankings. On a year-to-year basis, the performance of the Houston market bodes well for ZION and CMA," UBS analyst Greg Ketron said in a note to clients.

Existing home sales were up 8.6 percent compared with September and housing starts were up 3.6 percent with a wide dispersion in growth rates from different regions of the U.S. The West had above average growth for both categories. Sales in the South were also positive as were housing starts in the Midwest.

"Western-based banks UMPQ, CYN, and ZION are best positioned to benefit from both. WFC, STI, and BBT are among the highest potential beneficiaries from improved housing sales, and USB and TCB are among the highest for housing starts," Ketron said.

Banks with large mortgage origination businesses clearly stand to benefit from strong home sales and refinance activity. Some of the banks expected to benefit include U.S. Bancorp (NYSE: USB), KeyCorp, (NYSE: KEY), Fifth Third Bancorp (NASDAQ: FITB), BB&T Corp. (NYSE: BBT) and Suntrust Banks, Inc. (NYSE: STI).

Big mortgage originators such as Wells Fargo & Co. (NYSE: WFC) could benefit from increased activity while companies with high legacy mortgage costs like Bank of America Corp. (NYSE: BAC) and SunTrust Banks also stand to benefit.

Of these, Fifth Third Bancorp is the best play as it's the least consensus for this theme and trades at a 10 percent discount to peers on 2013 estimates despite higher returns and better earnings quality.

Meanwhile, with credit costs already down sharply for most, there would be a meaningful decline in provision expense in 2013 at BB&T, Citigroup, Inc. (NYSE: C), SunTrust and TCF Financial, with the biggest decline at TCF.

"Trading at an average P/TBV of <1.5X and an average P/E of 10.4X ‘13E EPS, we continue to see value in regional banks as leverage to an improving economy and housing markets, market share gains, and lower regulatory burdens serve as key levers," Ketron added.



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