FBR Capital on Financial Institutions: Another Day, Another Overhang

FBR Capital on Financial Institutions: Another Day, Another Overhang: Why Banks Just Can't Get Out of Their Own Way

FBR analyst says, "It is no secret that the banking sector has been under pressure for a number of reasons, many of which are hard to quantify and perhaps overblown. On the other hand, it seems that just as investors are getting comfortable with any one of the overhangs, there is a new headline, investigation, or regulation that triggers renewed concern. Because these overhangs are numerous and the details remain fluid, we wanted to prepare a document to serve as reference for each issue, including a status update and our best estimate on timing and impact. In the report below, we break up these issues into three categories: (1) overhangs related to the front end of the mortgage process, including originations and securitizations; (2) overhangs related to the back end of the mortgage process, including servicing, modification, and foreclosure process on existing loans; and (3) overhangs related to regulatory concerns. Because of all of these overhangs, we remain cautious on the group, but we continue to view U.S. Bancorp (NYSE: USB)(Outperform), The PNC Financial Services Group (NYSE: PNC)(Outperform), and Morgan Stanley (NYSE: MS)(Outperform) favorably as they have successfully weathered the storm and should continue to do so."

Who We Still Like and Why

Broker Dealers Morgan Stanley (NYSE: MS) - We continue to like Morgan Stanley in the context of the regulatory headwinds. Coming out of the economic crisis, Morgan Stanley is still in franchise repair mode and under-earning peers. As the company repairs its franchise, Morgan Stanley has the opportunity to grow market share and earnings even as regulatory headwinds continue. Finally, Morgan Stanley’s focus on retail investors helps insulate the firm from the more onerous regulatory issues facing the more institutionalfocused businesses.

Large Cap/Super Regional - PNC (NYSE: PNC) and U.S. Bancorp (NYSE: USB) - We continue to favor PNC Financial and U.S. Bancorp as they have been relatively unharmed by recent regulatory changes and legal challenges. Further, as overcapitalized, mid-sized institutions with conservative balance sheets, both institutions do not share the mortgage origination and servicing issues of the larger banks and do not suffer from outsized CRE exposure like the smaller regionals. Without these overhangs, we believe that PNC Financial and U.S. Bancorp are poised to take advantage of any economic recovery and capture the corresponding loan growth.

Small/Mid Cap - NPBC, FFIC, and FNB: We favor National Penn Bancshares, Inc. (Nasdaq: NPBC)(Outperform), Flushing Financial Corporation (Nasdaq: FFIC)(Outperform), and F.N.B. Corporation (NYSE: FNB)(Outperform). These three companies have limited residential mortgage operations, and those loans originated are higher quality loans originated for their own balance sheets (some amount of conforming 30-year mortgages may be sold).

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