The Best Bank Stocks in the KBW Index

8/7/2019 The Best Bank Stocks in the KBW Index

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Ascendere Associates LLC February 1, 2011

J. Stephen Castellano Page 1 [email protected]

Ascendere Associates LLC Innovative Long/Short Equity Research

M&T Bank Corp: The Best Bank Stock in the KBW Index: February 1, 2011

The overall theme from Andrew Upwards January 26 piece from Fidelity Capital Markets was that investors might be frustrated in their expectations for the performance of

bank stocks to catch up to the broader market. He points out that there were at least two recent periods where the S&P 500 outperformed the 24 bank stocks in the Keefe,

Bruyette & Woods Bank Sector Index, and that the mid-2000 reflation dynamics that helped bank stocks back then are currently not present.

While that may be the case, there may be a few exceptions as reflected in surging ROEs for some banks. What is driving these expanding ROEs? The reflation of previously

written off bad assets? Better credit quality of bank customers? Lower ongoing write-offs?

Fortunately for our clients, one does not have to be an Financial sector expert to recognize that bank ROEs have been surging. By ranking Bank stocks by four key factors 1)

Relative Value; 2) Operating Momentum; 3) Analyst Revision Momentum; and 4) Fundamental Quality we can find a number of attractive bank stock candidates for short-term

and long-term positions.

Three banks in the KBW Bank Sector Index (BKX) look particularly attractive, with two of them currently part of our high-turnover model portfolios (including areal model based

on actual trade data). The three stocks are Capital One Financial Corp. (COF), PNC Financial Services Group Inc. (PNC) and M&T Bank Corp. (MTB). Not only do these stocks

look attractive within the KBW index, but according to our measures these are currently some of the best stock ideas in the entire Financial sector right now. COF is ranked5,5,5,4; PNC is ranked 4,4,4,4; and MTB is ranked 3,4,5,5.

Based on our models, it appears that ROE may have peaked for PNC and COF in the latest quarter, but this forecast is of course not etched in stone. We would give them the

benefit of doubt since it is possible estimates may continue to rise, the companies may continue to report "surprisingly" good financial results and find additional ways to cut

costs and improve operating efficiency. Whether one believes in this scenario or not may be largely irrelevant -- if a portfolio manager is required to own a certain number of

Financial sector stocks he would do well to focus his time learning about the relatively best three of them.
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While we do not own M&T Bank Corp. (MTB) in our model long portfolios, this actually looks like one of the best Financial sector stock ideas we have come across. Not only is it

ranked 3,4,5,5 -- which anecdotally has represented stocks that may not appear to offer much value but keep surprising substantially on the upside -- but forecast ROE also looks

like it should continue to increase.

We have seen East West Bancorp (EWBC) mentioned in tandem with MTB as some investors' favorite stock ideas. EWBC is currently ranked 2,5,5,5 -- by our measure it has

entered growth territory as opposed to GARP. Since we owned EWBC as a 3,4,5,5 stock since November we have decided to keep it in our portfolio. We prefer not to

recommend growth stocks as initial purposes, but we like the idea of holding on to a GARP stock that has transformed into a high-quality growth stock; we have seen similar

transformations in rankings with stocks like Apple Inc. (AAPL), Neflix (NFLX) and Chipotle (CMG). ROE for this bank is also forecast to improve over 2011.

In our opinion, COF, MTB and PNC are the relatively best bank stock ideas at the current moment, and EWBC is intriguing as well. Of these four, we think MTB could prove to be

one of the best Financial sector ideas; it certainly deserves further study as a long-term holding. Below we provide summary data tables on stocks in the KBW Bank Sector

Index, including some additional incremental data for COF, PNC, MTB and EWBC.


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KBW Bank Stock Index

Ascendere Associates Rankings as of January 28, 2011

Highlighted stocks are the most attractive ideas in the KBW Bank Sector Index.

KBW Bank Stock Index

January 28, 2011 January 28, 2011

Sector Base Long Portfolio Ticker

Market

Cap Price 1yr Beta

1yr

Volatility

Annualized

3-Month

Volatility

Relative

Value

Operating

Momentum

Analyst

Revisions

Momentum

Fundament

al QualityFinancials Bank of America Corporation BAC 137,158 13.60 1.39 34.0% 34.9% 1 1 2 2

Financials BB & T Corp. BBT 18,929 27.26 1.22 30.6% 31.6% 2 1 4 1

Financials The Bank of New York Mellon CBK 38,338 30.88 1.15 24.4% 23.9% 3 5 4 4

Financials Citigroup, Inc. C 137,155 4.72 1.42 34.9% 29.5% 3 4 2 2

Financials Commerce Bancshares Inc. CBSH 3,578 41.06 1.01 20.6% 17.9% 3 3 4 5

Financials Cullen/Frost Bankers, Inc. CFR 3,558 58.22 0.87 19.1% 19.0% 3 2 1 4

Financials Comerica Incorporated CMA 6,707 37.99 1.52 33.3% 29.9% 2 4 5 4

Financials Capital One Financial Corp. COF 21,843 48.24 1.28 33.2% 27.7% 5 5 5 4

Financials Fifth Third Bancorp FITB 13,613 14.64 1.79 37.5% 33.6% 2 3 4 2

Financials First Niagara Financial Group In FNFG 2,923 13.98 0.82 21.0% 19.1% 2 2 2 4

Financials Huntington Bancshares Inc. HBAN 6,104 7.07 1.98 46.4% 34.6% 2 4 5 4Financials JPMorgan Chase & Co. JPM 174,115 44.54 1.10 26.3% 25.5% 4 5 5 2

Financials KeyCorp KEY 7,741 8.79 1.68 38.1% 32.8% 3 4 5 1

Financials M&T Bank Corp. MTB 10,342 86.35 1.14 31.8% 21.7% 3 4 5 5

Financials Northern Trust Corporation NTRS 12,523 51.69 0.90 21.2% 20.7% 3 2 1 4

Financials New York Community Bancorp NYB 7,959 18.27 0.79 20.5% 18.9% 3 4 1 2

Financials People's United Financial Inc. PBCT 4,536 12.96 0.82 20.6% 18.0% 1 1 5 2

Financials PNC Financial Services Group I PNC 31,606 60.11 1.50 32.4% 26.8% 4 4 4 4

Financials Regions Financial Corp. RF 8,642 6.88 1.77 43.8% 45.2% 1 5 2 1

Financials SunTrust Banks, Inc. STI 14,803 29.58 1.80 39.4% 34.7% 1 5 5 2

Financials State Street Corp. STT 23,299 46.41 1.36 28.0% 25.6% 3 2 2 2

Financials U.S. Bancorp USB 51,411 26.80 1.19 25.3% 23.3% 3 2 2 4

Financials Wells Fargo & Company WFC 167,120 31.84 1.51 32.7% 27.5% 4 2 1 4

Financials Zions Bancorp. ZION 4,283 23.43 1.95 47.0% 31.6% 1 4 1 1

Source: Ascendere Associates LLC


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Most Attractive Financial Sector Stocks

Ascendere Associates Rankings as of January 28, 2011

Source: Ascendere Associates LLC

Highlighted stocks are currently owned held in our long model portfolios.

High Quality Stocks

January 28, 2011 January 28, 2011

Sector Base Long Portfolio Ticker

Market

Cap Price 1yr Beta

1yr

Volatility

Annualized

3-Month

Volatility

Relative

Value

Operating

Momentum

Analyst

Revisions

Momentum

Fundament

al QualityFinancials Ares Capital Corporation ARCC 3,168 16.45 1.26 28.4% 22.3% 5 5 4 4

Financials Sumitomo Mitsui Financial Gro SMFG 48,784 6.87 0.60 24.7% 29.7% 5 5 5 4

Financials Capital One Financial Corp. COF 21,843 48.24 1.28 33.2% 27.7% 5 5 5 4

Financials Canadian Imperial Bank of ComCM 29,845 75.71 0.99 26.2% 19.1% 4 5 4 4

Financials American Express Company AXP 52,797 43.86 1.32 30.7% 23.2% 5 4 4 4

Financials Franklin Resources Inc. BEN 26,999 120.84 1.36 28.3% 22.9% 4 4 5 5

Financials The Bank of New York Mellon CBK 38,338 30.88 1.15 24.4% 23.9% 3 5 4 4

Financials PNC Fi nanci al Servi ces Group I PNC 31,606 60.11 1.50 32.4% 26.8% 4 4 4 4

Financials Bank of Montreal BMO 32,867 57.76 0.91 25.0% 24.3% 4 4 4 4

Financials Credicorp Ltd. BAP 8,333 104.48 0.87 24.4% 20.8% 5 3 4 5

Financials Banco de Chile BCH 11,736 84.50 0.43 26.8% 23.4% 5 3 4 5

Financials Waddell & Re ed Financial Inc. W DR 3,096 36.26 1.83 36.3% 27.4% 4 3 5 4

Financials M&T Bank Corp. MTB 10,342 86.35 1.14 31.8% 21.7% 3 4 5 5

Financials T. Rowe Price Group, Inc. TROW 16,886 65.85 1.38 25.9% 23.2% 4 3 5 5

Financials Commerce Bancshares Inc. CBSH 3,578 41.06 1.01 20.6% 17.9% 3 3 4 5

Financials East West Bancorp, Inc. EWBC 3,191 21.56 1.84 40.2% 29.6% 2 5 5 5


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Ranking Data as of January 28, 2011

Capital One Financial Corp.

NYSE:COF

Financials

Consumer Finance

Ascendere Ranking Price 02/01/11 49.58 Cash (5,249) EV/LTM EBITDA

Shares 453 Debt 41,796 Price/Book 1.7

Market Cap 21,807 Other

5 = Best Rank Enterprise Value

Relative Value 5

Operating Momentum 5 CY1 Consensus EPS Est. 5.20$ CY1 PE 9.5 Shareholder's Equity 26,541$

Analyst Revisions Mom 5 CY2 Consensus EPS Est. 5.39$ CY2 PE 9.2 Debt/Capital

Fundamental Quality 4 Latest Annualized Dividend 0.20$ Div Yield 0.4% Debt/Enterprise Value

Source: Capital IQ data and estimates, and Ascendere Associates LLC data and estimates.

NYSE:COF Estimate Estimate Estimate Estimate EstimateROE Model (Financials) 3/31/12 12/31/11 9/30/11 6/30/11 3/31/11 12/31/10 9/30/10 6/30/10 3/30/10 12/31/09 9/30/09 6/30/09 3/30/09 12/31/08

Total Equity 29,485 28,856 28,304 27,741 27,160 26,541 26,061 25,270 24,374 26,589 26,222 25,330 26,744 26,612

IQ_NI_NOR IQ_EARNING_CO

Income (excluding exceptions) 2,339 2,392 2,468 2,603 2,731 3,050 2,753 2,373 1,790 987 (813) (865) (631) 85

Average Total Equity 28,309 27,720 27,162 26,555 25,881 25,767 25,703 25,557 25,852 26,300 26,104 25,844 25,702 25,212

Return on Equity 8.3% 8.6% 9.1% 9.8% 10.6% 11.8% 10.7% 9.3% 6.9% 3.8% -3.1% -3.3% -2.5% 0.3%

Source: Captial IQ data and estimates, Ascendere Associates data and estimates.


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Capital One Financial Co Price 49.83COF NTM EPS 5.20$

Financials NTM PE 9.6

Consumer Finance R/R 4.3 to 1

Max up to ten years Three years One year One year historically implied target range

01/30/01 to 02/01/11 02/05/08 to 02/01/11 02/02/10 to 02/01/11 NTM EPS Target 49.83$

Max PE 28.0 02/03/09 Max PE 28.0 02/03/09 Max PE 20.0 04/13/10 Max EPS 6.50$ 130$ 161%

Average PE 12.3 Average PE 12.3 Average PE 12.5 Average EPS 5.20$ 65$ 30%

Min PE 5.7 03/11/03 Min PE 5.7 03/11/03 Min PE 7.6 11/23/10 Min EPS 4.15$ 31$ -37%

Source: Capital IQ data and estimates, Asc endere Ass ociates data and estimates.

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P/E Average +1 St. Dev. -1 St. Dev. Stock Price


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PNC Financial Services Group Inc.

NYSE:PNC

Financials

Regional Banks





Relative Value 4





NYSE:PNC Estimate Estimate Estimate Estimate Estimate

ROE Model (Financials) 3/31/12 12/31/11 9/30/11 6/30/11 3/31/11 12/31/10 9/30/10 6/30/10 3/30/10 12/31/09 9/30/09 6/30/09 3/30/09 12/31/08

Total Equity 32,780 32,108 31,462 30,832 30,208 30,242 30,042 28,377 26,818 29,942 28,928 27,294 26,477 25,422


Income (excluding exceptions) 3,011 2,953 2,900 2,757 2,703 3,039 3,356 3,143 2,539 2,402 896 584 903 764


Return on Equity 9.6% 9.5% 9.5% 9.2% 9.3% 10.4% 11.6% 11.1% 9.1% 8.7% 3.7% 2.7% 4.7% 4.5%



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PNC Financial Services GPrice 62.252PNC NTM EPS 5.65$


Regional Banks R/R 3.1 to 1






Source: Capital IQ data and estimates, Asc endere Assoc iates data and estimates.

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M&T Bank Corp.

NYSE:MTB

Financials

Regional Banks





Relative Value 3





NYSE:MTB Estimate Estimate Estimate Estimate EstimateROE Model (Financials) 3/31/12 12/31/11 9/30/11 6/30/11 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/30/09 6/30/09 3/31/09 12/31/08

Total Equity 8,104 7,991 7,878 7,780 7,694 8,358 8,232 8,102 7,916 7,753 7,612 7,400 6,902 6,785


Income (excluding exceptions) 818 783 757 729 718 736 669 604 467 380 345 309 418 556


Return on Equity 10.4% 9.9% 9.5% 9.1% 8.9% 9.1% 8.4% 7.8% 6.2% 5.2% 4.9% 4.5% 6.3% 8.5%



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M&T Bank Corp. Price 87.43MTB NTM EPS 6.21$


Regional B anks R/R 2.7 to 1






Source: Capital IQ data and estimates, Ascendere Ass ociates data and estimates.

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East West Bancorp, Inc.

NasdaqGS:EWBC

Financials

Regional Banks





Relative Value 2





NasdaqGS:EWBC Estimate Estimate Estimate Estimate Estimate

ROE Model (Financials) 3/31/12 12/31/11 9/30/11 6/30/11 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/30/09 6/30/09 3/31/09 12/31/08

Total Equity 2,363 2,308 2,255 2,204 2,157 2,114 2,385 2,339 2,306 2,285 1,522 1,477 1,535 1,551


Income (excluding exceptions) 232 221 217 203 185 165 368 252 129 82 (175) (138) (77) (50)


Return on Equity 10.3% 10.0% 9.8% 9.1% 8.2% 7.2% 17.0% 12.7% 7.1% 4.9% -11.9% -9.7% -5.7% -3.9%


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East West Bancorp, Inc. Price 21.96EWBC NTM EPS 1.49$


Regional Banks R/R 8.5 to 1






Source: Capital IQ data and estimates, Ascendere Assoc iates data and estimates.

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DISCLOSURESAscendere is in the business of providing equity research and related consulting services to investors and their advisors. The equity research it provides includes

basic quantitative model portfolios and more detailed fundamental research with respect to individual stocks. In addition, the firm manages stock portfolios for

itself and clients. Ascendere currently sources financial data from Capital IQ.

Ascendere does not rate stocks on any scale, but does offer individual stock commentary and valuation opinions. With regard to Ascendere's portfolio

strategies, "long" or "high-quality" baskets should generally be considered buys, unless otherwise noted. Stocks in our "short" or "low-quality" baskets should

generally be considered sells, unless otherwise noted. While exceptions may occasionally occur, typically stocks in the high-quality basket are expected to

outperform the S&P 500 over a month's time and stocks in the low-quality basket are expected to underperform. A more relevant benchmark would comprise

of all stocks and ADRs that trade on major U.S. stock exchanges with a market cap above $ 2 billion.

Ascendere adheres to professional standards and abides by codes of ethics that put the interests of clients ahead of its own. The following are specific

disclosures made by Ascendere:

1) Ascendere may have a financial interest in the companies referred to in this report ("the Companies"). The research analyst covering the Companies

and members of the analyst's immediate family have a financial interest in one or more of the Companies.

2) Ascendere generates revenue from research subscription revenue and portfolio management fees. At any given time it may be long or short any ofthe Companies.

3) Ascendere does not make a market in the securities of any of the Companies.

4) Ascendere has not received compensation from the Companies.

5) Ascendere has not managed or co-managed a publ ic offering for any of the Companies.

6) Neither Ascendere nor any of its officers or any family member of the covering analyst serve as an officer, director or advisory board member of any

of the Companies.

7) Neither Ascendere nor any of its officers or any family member of the covering analyst beneficially own 1% or more of any class of securities of any of

the Companies.

8) The covering analyst certifies that this report accurately reflects such analyst's personal views.


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DISCLAIMERSThis report is intended for informational purposes only and does not constitute a recommendation, or an offer, to buy or sell any securities or related financial

instruments. The report is not intended to be in furtherance of the specific investment objectives, financial situation, or particular needs of any individual

recipient. The information contained herein accurately reflects the opinion of Ascendere at the time the report was released. The opinions of Ascendere are

subject to change at any time without notice and without obligation or notification. The officers, affiliates or family members of Ascendere Associates may hold

positions in the securities of the Companies. No warranty is made as to the accuracy of the information contained herein. This information is intended for the

sole use of clients of Ascendere. Any other use, distribution or reproduction is strictly prohibited. Investing in stocks includes a high degree of risk, including the

risk of total loss. For additional information on risks, disclosures, disclaimers and frequently asked questions, please see the back of any monthly report.

Note:

We currently hold shares of ARCC, COF, AXP, PNC, WDR, TROW and EWBC in a real portfolio that we manage.

The Best Bank Stocks in the KBW Index

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