Don’t Lose Any Sleep Over Regional Banks’ Stress Tests

by Dan Burrows | March 23, 2012 11:47 am

Don’t Lose Any Sleep Over Regional Banks’ Stress Tests

Did regional banks Zions Bancorporation (NASDAQ:ZION[1]) and Regions Financial (NYSE:RF[2]) get a free pass on the Federal Reserve’s stress test so they could pay back their TARP funds? One analyst thinks it’s a distinct possibility[3], according to a recent report. But given the extreme nature of the tests — and plenty of other headwinds for these banks — investors probably needn’t fret. Both bank stocks are holds at best, regardless.

Both Zions and Regions were the two biggest remaining TARP recipients heading into the stress tests, which saw a handful of names fail: Citigroup (NYSE:C[4]), SunTrust Banks (NYSE:STI[5]), MetLife (NYSE:MET[6]) and Ally Financial. After the regional banks passed the test, the firms announced their intention to repay a combined $4.9 billion in TARP capital, representing about 30% of all outstanding TARP investments remaining.

Todd Hagerman, an analyst with Sterne Agee, told Fortune that Zions and Regions “received a pass in terms of the rigor of the test and getting out of TARP itself.” The Fed, for its part, said none of the banks were rubber-stamped. The formula for the stress tests is held secret, so it’s impossible to check the Fed’s math, but we do know that Zions and Regions were subject to different criteria than the nationals/internationals since they are not among the biggest — and therefore most systemically critical — financial institutions.

For what it’s worth, other analysts came up with different calculations for the regional banks’ Tier I capital ratios, which were at the heart of the stress tests. Guggenheim Securities, for example, figured Zions would prove to be adequately capitalized. Analysts at Keefe, Bruyette and Woods saw the potential for Regions to fall just short.

But again, these were independent estimates, flying blind because of the Fed’s purposeful opacity. Either way, it doesn’t matter now — and let’s pray it never does.

As much as the focus fell on the firms that failed the stress test, the important takeaway is that the great majority of banks passed[7]. Under the criteria of the Fed’s testing, the U.S. banking system appears adequately capitalized should it be swamped by another financial crisis tsunami, as it was during the catastrophe of 2008. (All bank stocks will plunge if something like that happens again, anyway, Tier I capital ratios be damned.)

And as for the specific cases on investing in Zions and Regions, it’s not like there’s a compelling reason to initiate a position. Both stocks appear cheap on a price-to-book ratio (P/B), but then the market is merely saying they are cheap for a reason. Healthier banks like Wells Fargo (NYSE:WFC[8]) and JPMorgan Chase (NYSE:JPM[9]) currently get P/B’s of 1 or more. Troubled banks like Citigroup and Bank of America (NYSE:BAC[10]) trade at P/B’s well below 1 — and that’s where the market is valuing both Zions and Regions.

Even Wall Street analysts, in the aggregate, aren’t banging the drum for either of these stocks. Analysts’ average recommendation on Zions and Regions stands at hold. Meanwhile, the median price target on Regions stands at $6.50 (the stock is essentially there), meaning analysts see no implied upside in the next 12 months or so. The same goes for Zions. The median target stands at $22.50 with the stock trading a bit north of $21.

Whether Zions and Regions got a free pass on the stress tests is immaterial at this point. There’s nothing compelling about their respective valuations, and even analysts are hardly excited about their short-term prospects. Barring another global financial crisis, a free pass on the stress test shouldn’t matter.

And if we do suffer another disaster on the same scale of the last one, well, we’ll all have much bigger problems, anyway.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. ZION: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZION
  2. RF: http://studio-5.financialcontent.com/investplace/quote?Symbol=RF
  3. thinks it’s a distinct possibility: http://finance.fortune.cnn.com/2012/03/21/federal-reserve-stress-test-inflated-grades/
  4. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  5. STI: http://studio-5.financialcontent.com/investplace/quote?Symbol=STI
  6. MET: http://studio-5.financialcontent.com/investplace/quote?Symbol=MET
  7. great majority of banks passed: http://investorplace.com/2012/03/federal-reserve-stress-tests-jpm-dividend-citi/
  8. WFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFC
  9. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  10. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC

Source URL: http://investorplace.com/2012/03/dont-lose-sleep-over-regional-banks-stress-tests-zion-rf/
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