Big Banks Are Beating Earnings Estimates

TheStreet.com

NEW YORK (TheStreet) -- Given the free money available from the Federal Reserve it is not surprising that only two of the 24 banks in the PHLX KBW Banking Index did not beat their second quarter earnings estimates. The four 'too big to fail' money center banks are in this banking index and as I expected each had the accounting flexibility to easily beat Wall Street estimates.

When I compare assets among the 'too big to fail" banks at the end of 2010 to the assets at the end of first quarter of 2013 three of the big four are bigger.

The table above shows that at the end of 2010 The FDIC Quarterly Banking Profile showed that the four TBTF banks accounted for 43.3% of the total assets in the banking system at $5.77 trillion. At the end of the first quarter 2013 these four banks added 10.1% to this for a total of $6.35 trillion, or 44.0% of all assets.

JP Morgan ($56.16) was the biggest of the big at the end of 2010 with $1.76 trillion in assets or 13.2% of the total assets in the banking system. Since then to the end of the first quarter 2013 this bank increased assets by 17.7% to $2.07 trillion or 14.4% of the total assets in the banking system.

Bank of America was the second biggest bank at the end of 2010 with $1.54 trillion in assets or 11.6% of the total assets in the banking system. At the end of the first quarter of 2013, Bank of America continues to be in second place increasing assets by 6.3% to $1.64 trillion or 11.4% of the total assets in the banking system.

Citigroup was the third biggest at the end of 2010 with $1.31 trillion in assets or 9.8% of the total assets in the banking system. At the end of the first quarter 2013 Citi slipped into fourth place with a 0.24% decline in assets, and 9.1% of the total assets in the banking system.

Wells Fargo was the fourth biggest at the end of 2010 with $1.15 trillion in assets or 8.7% of the total assets in the banking system. At the end of the first quarter 2013 Wells jumped over Citi into third place with a 15.4% rise in assets to $1.33 trillion or 9.2% of the total assets in the banking system.

In my opinion, no bank should be allowed to have more than 10% of the assets in the banking system. All four of the TBTF have hold ratings according to ValuEngine with limited upside over the next 12 months. Investors long these names should consider cutting positions by 50% at this time.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: Price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC limit order to sell on strength.

All 24 components of the banking index have hold ratings and only one is undervalued with the finance sector 20.4% overvalued. Citigroup has become the most overvalued by 105.1%.

Note that 23 of 24 regional banks gained by double-digit percentages over the last 12 months. Bank of America was the leader with a gain of 103.2% versus a year ago.

All 24 components are projected to move sideways over the next 12 months which justifies my asset allocation rating of equal-weight for bank stocks.

All 24 are above their 200-day simple moving averages reflecting the risk of a reversion to the mean.

Banks reporting quarterly results this week:

Zions Bancorp ($30.55) reports quarterly results afterhours today and is expected to earn 42 cents per share. Zions set its multi-year high at $31.40 on July 8. My monthly value level is $28.40 with a weekly pivot at $30.57 and semiannual risky level at $32.35.

Regions Financial ($10.23) reports quarterly results premarket on Tuesday and is expected to earn 21 cents per share. Regions set its multi-year high at $10.34 on July 8. My semiannual value level is $9.81 with a weekly pivot at $10.14.

Cullen Frost Bank ($72.07) reports quarterly results premarket on Wednesday and is expected to earn 94 cents per share. Cullen Frost set its multi-year high at $72.77 on July 8. My weekly value level is $71.26.

New York Community Bank ($14.91) reports quarterly results premarket on Wednesday and is expected to earn 25 cents per share. NY Community set its 2013 high at $14.92 on Friday versus its Oct. 9, 2012 high at $15.05.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.

View Comments (2)