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Largest U.S. Banks No Longer Cheap After Gains, KBW Says

Stocks of the largest U.S. banks probably won’t outperform the broader market in 2014 after many climbed more than 30 percent this year, said Christopher Mutascio, an analyst at Stifel Financial Corp.’s KBW unit.

The median growth in earnings per share at 11 of the largest banks, including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co., is likely to be 2 percent next year, after a 16 percent jump in 2013, Mutascio wrote yesterday in a report. Adjusted earnings per share may fall at JPMorgan and PNC Financial Services Group Inc., he said.

“The large-cap banks no longer appear cheap,” Mutascio wrote. “The three primary tailwinds for large bank earnings growth in recent years are either becoming headwinds or are likely to represent much less of a catalyst going forward.”

Those tailwinds were mortgage-banking income, lower provisions for loan losses and declining expenses from soured lending, Mutascio wrote. Short-term interest rates are unlikely to rise in 2014, and costs for the group may only fall by 1 percent, he said.

The 24-company KBW Bank Index (BKX) has climbed 30 percent this year, outpacing the 25 percent increase in the Standard & Poor’s 500 Index. That would be the third time in four years that the bank index outperformed the broader market, after six straight years of underperformance from 2004 through 2009.

The 11 lenders, which also feature Bank of America Corp. and KeyCorp, rose by a median 31 percent this year, according to KBW. That leaves them at a higher relative price-to-earnings ratio compared with the broader market than the average over the past 18 years, Mutascio wrote.

Next year could be “more fruitful” for mergers and acquisitions among smaller and mid-sized banks as those lenders look to increase scale amid increasing regulatory costs, KBW analysts led by Jefferson Harralson wrote in a separate note. Buyers who announced deals this year have been disciplined in pricing, and regulators have been “a lot more promising in their attitudes” toward small-bank transactions, they wrote.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net

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