Seven Banks to Watch

We stumbled upon some data this morning we must share:

Financials' 28 percent forward earnings growth outshines every other sector by a significant margin, which in turn raises three key questions:
1. Is the growth real?
2. Are financials masking weakness elsewhere in the S&P 500?
3. What's the implication for investors?

First, let's highlight the drivers of bank earnings:

Banks have been able to shift cash from loan loss reserves to the asset side of the balance sheet as U.S. delinquencies exceeding 90 days have fallen from a crisis high 9.7 percent in December 2009 to 5.9 percent currently. This process has helped increase earnings and will likely continue to provide a tailwind as delinquencies recede to pre-crisis levels near 2 percent.

Banks have also benefited from the so-called Debt Value Adjustment (DVA), a FASB accounting rule allowing banks to take a credit for the falling value of their own bonds (since their bonds would be cheaper to buy back and retire). Fed taper talk and rising rates over time suggest banks may continue to benefit from this adjustment in future quarters.

Finally, banks borrow short-term via paying interest on deposits, and lend long-term via mortgages and commercial loans. As the economy improves, longer-term rates tend to rise to reflect higher future growth. A widening yield curve implies wider profit margins for banks. Again, a net positive for bank earnings. Given these broadly positive trends, coupled with 12 consecutive months of commercial/industrial loan growth to a record $1.56 trillion, we screened the 81 companies in the S&P 500 financial sector for highest growth at the lowest price. Here's what we found:

SunTrust Banks (STI), Citigroup Inc (C), JPMorgan Chase (JPM), PNC Financial Services (PNC), Wells Fargo (WFC), Fifth Third Bancorp (FITB), Regions Financial Corp (RF)

These seven banks together are up 24 percent this year, compared to 14.9 percent for the S&P 500. 28 percent earnings growth has clearly caught others' attention as well.

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