Thomas Weisel research comment on roaring U.S. bank stocks

This note is from the bank analyst at Thomas Weisel Equity Research:

“Our industry average advanced 28.5% last week after declining 19.7% the previous week. Both price changes represented record weekly moves. Concerns about the viability of the industry were lessened as several large banks indicated they were profitable in January and February. Additionally, there were heightened prospects for reinstating the uptick rule and amending fair value accounting. Thus far in 2009, the banks are still down 29.1% compared to a 16.2% decline for the S&P 500. However, we may have finally established a hard bottom for bank stock prices (as evidenced by the March 6, 2009, closing price of $18.62 for the BKX index).

Bank stocks are down about 77% over the past two years, yet the sector displays tremendous bounce-back potential. This has been a brutal bear market that has devastated value players. While the risk-reward ratios for some banks are very attractive, the lack of buying power, coupled with heightened short selling activity, widespread fear, and economic malaise, has undermined any sustainable rally. Believe it or not, the bank stocks have not being going straight down. In fact, they rallied about 70% from the July 2008 lows in two months, 35% from the November 2008 lows in three weeks, 25% from the January 2009 lows in one week, 22% from the February 20 lows in four days, and 37% from the March 2009 lows in five days. We still believe the banks can lead us out of this bear market well before we enter the recovery phase, and well before NPAs and NCOs
peak.

We were on the road in Florida and Texas with New York Community Bancorp (NYB/$9.47/Strong Buy) last week as the company reiterated its very favorable outlook for operating EPS, NIM, loan growth, and NCOs. It has a very safe common stock dividend yielding 10.6%, trades at only 77% of book and nine multiples below its three-year-average P/E, and is expected to grow EPS at least 20% in 2009 and 10% in 2010. The company turned down TARP, has very strong capital and reserve levels, and is expected to keep NCOs below 0.10% of average loans. During past recessions, it has posted double-digit growth while maintaining superior credit quality.

Bank of America (BAC/$5.76/Strong Buy) bounced back 83% last week, and we believe the stock can double by year-end 2009. We were encouraged by CEO Ken Lewis’ comments that the company will remain profitable and generate more than $100 billion in revenue in 2009, would pass the government’s stress test, and will not require more capital from taxpayers.

Additionally, we estimate (longer-term) core EPS power of at least $4.00 if the company does not convert any preferred shares into common stock. We expect the tangible common equity ratio to rise above the 3.00% by mid 2010 as the company benefits from retained earnings and strategic asset sales. We expect tangible book value per share to approach $12.00 by mid 2010.”

MRM