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4 Banks You Should Still Buy in This Market - 14107 views
BALTIMORE (Stockpickr) -- Let’s face it -- 2011 hasn’t been a particularly good time to be a banker. Bank profits have been squeezed significantly this year , smashed lower as lucrative interest rate spreads narrow and trading desks struggle to wrangle these challenging markets.
At the same time, banks’ share prices have gone on sale. As a sector, bank stocks have shed 20% so far this year, delivering negative returns that are almost ten times worst than the broad market during an already tepid year.
That’s why it’s time to buy banks.
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Bear with me. I’m not advocating buying all banks -- or even most. While financials have shown some recent technical signs of a bottom, I wouldn’t recommend the vast majority as anything but a short-term trade. Still, there are some bargain opportunities in the banking business.
By and large, the big banks are the ones that are struggling the most. After all, they’re the ones that levered up the highest during the financial crisis and took on the potentially scarring assets of their ailing peers in its aftermath. Not so incidentally, they’re also the ones trying to earn a profit by playing the yield curve rather than by actually lending in this environment.
That’s not the case in the large regional banking names, however. While these names lack the revenue diversification that made the big banks so attractive half a decade ago, that exposure to higher quality loan books makes them a whole lot more attractive right now. The sinking tide in the banking industry has beached all ships -- that means that there are some bargains in the regional banking names right now.
Here’s a look at four banks you should still buy, even in this market.
With its base of operations centered on the Southeast, BB&T (BBT) hasn’t been immune to exposure to mortgage trouble hotspots like Florida, but loftier underwriting standards mean that this bank wasn’t as hard hit as its bigger peers. As a result, BB&T was actually able to maintain profitability during the height of the financial crisis. While a stricter loan book meant that the bank delivered so-so returns during the height of the boom, it’s helped to contribute to solid double-digit net margins today.
That’s not to say that BB&T didn’t partake in the smorgasbord of cheap competitor assets that went on sale back in 2009 -- it did. The firm picked up $22 billion in assets from Colonial Bankgroup from the FDIC after regulators had already wrung nearly all of the risk out of the transaction. As the overall banking environment improves, BB&T’s increased scale should be a major selling point.
Capital reserves are crucial right now, both for investors and for potential customers. BB&T’s Basel III tier 1 common ratio already exceeds the capital requirements regulators are posing for banks of its size. Given the somewhat fluid nature of those requirements, that’s a very good thing.
A 2.8% dividend payout adds extra onus to this regional bank’s buying argument.
M&T Bank (MTB) is another example of a banking name that came out of the financial crisis bigger and stronger than it was when it went in. Like BB&T, this large regional bank tips the scales -- but its limited footprint and major operating differences from the big banks make it worth watching right now. Here’s another example of a bank that’s stuck with banking.
Even though the low interest rate environment that’s being promulgated by the Fed is creating a challenging shrinkage of margins, the bank has been making up for it by increasing volume in recent quarters, particularly in its commercial loan book. The strict underwriting policies that M&T’s management enforced have made it one of the real standouts, even in the regional banking space. For comparison’s sake, M&T charged off a mere annualized 0.39% of loan value in third quarter; last quarter, the average charge-off for a large bank was more than four times that much.
One of the more telling things about this bank’s makeup is who owns it. Insiders own a material portion of M&T’s shares, and activist investors such as Warren Buffett ensure that shareholders’ interests are being looked after. Those are two important advocates to have right now.
M&T Bank shows up on a list of the Top 10 Warren Buffett Dividend Stocks.
It’s not exactly accurate to lump U.S. Bancorp (USB) in with other regional banking names. With a market capitalization that weighs in around $48 billion, this firm is nearly the size of BofA -- and it’s the same size or bigger than financial firms such as Goldman Sachs (GS) or Morgan Stanley (MS). That sort of scale means that USB should be on more investors’ radar right now, even if it’s not.
One of U.S. Bancorp’s most impressive roads to growth has been its fee-based business. In the last several years, USB has eschewed cheap peer assets, favoring instead to build out its burgeoning wealth management and trustee business -- a longer-term business that should help to deliver consistent top line numbers going forward. Fee-based revenues are generally recurring, and they tend to court stickier customers than traditional banking operations could hope to. That’s a knock out combination right now in this market.
Larger competitors have been stepping away from their more conservative fee-based revenue streams, opting to sell them off to build up liquidity. At the same time, USB has been in acquisition mode, buying up those units and building its fee-based sales to around 10% of revenues. Investors should appreciate that shift.
All things considered, traditional banking still makes up the majority of U.S. Bancorp’s business. Like the other names we’ve looked at, strong underwriting policies have meant that USB is able to generate net margins deep in the double-digits. That strength should help to solidify this sizable financial institution as it continues to build its wealth management arm.
Fifth Third Bancorp
The fee-based revenue theme continues with Fifth Third Bancorp (FITB), a regional banking name that owns 1,300 banking branches in the Midwestern and Southeastern U.S. Fifth Third has embraced the fee-based business for a long time, building its fee revenues to approximately 40% of total sales in 2010.
For Fifth Third, the majority of those fee-based revenues come in the form of payment processing fees. While loan losses and other more traditional metrics have come in on the low side compared with the other names on this list, Fifth Third’s payment business has been a sort of earnings parachute that’s diversified the firm’s needs away from the more traditional measures. The sheer breadth of that fee-based exposure grants Fifth Third a pardon on its credit quality.
Financially, this stock looks in solid shape right now, with a common equity ratio that settles on the high side of the spectrum. That sort of equity hasn’t come cheap -- longer-term shareholders have seen significant dilution in the last few years as a result of Fifth Third’s capital-raising efforts. Even so, it looks like the worst is over at this point. Now Wall Street is likely underestimating this stocks’ wherewithal.
Fifth Third is one of the top holdings of David Tepper's Appaloosa Management.
To see these four banking stocks in action, check out the Regional Banks Worth Buying portfolio at Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.