Most of the time, disgruntled consumers don’t actually follow through on threats to take their business elsewhere. When it comes to bank deposits, though, big banks — as well as their investors — better heed the warnings, as customers aren’t joking about leaving. Indeed, the numbers actually say the migration away from national banks and toward smaller, “home-grown” options already is under way.
That doesn’t mean you have to give up on bank stocks altogether, however. It just means you have to follow the money, and invest in the regional banking and S&L names that are welcoming with open arms those fed-up banking clients.
Numbers Don’t Lie
There are several ways to slice it, such as loss of customer head count, loss of deposits, declining number of accounts and so on. The criteria don’t matter — the stats and forecasts on all these fronts bode poorly for big banking names like Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC) and Citigroup (NYSE:C).
Take the total number of customers, for example. In a poll taken late last year, more than half of “big bank” customers were dissatisfied, and more than half wanted to take at least some of their money elsewhere. In terms of dollars, the same survey suggested the nation’s 10 biggest banking entities could see $185 billion vanish from their retail deposit base within the year as customers head for greener pastures.
A more recent study from J.D. Power and Associates jives with the data from the 2011 survey. More than 10% of big bank customers shopped for a new bank last year, with high fees being the No. 1 prompt. Though not all of them left, many did, and they went to — no surprise here — a smaller bank or a local savings and loan where service tends to be better and fees aren’t outrageous. That’s why smaller regional and community banks and S&Ls only lost 0.8% of their customers in 2011, while their bigger brothers gave up many more, on the order of 10.7%.
Another stat: Credit union membership for the nation grew by 1.3 million last year, up 1.4%, while total credit union assets swelled by $47 billion, or 5%, to $961.8 billion during 2011.
While the exact stats and figures for smaller bank asset growth aren’t published, there’s a clear trend paradigm shift in place. Investors ignore it at their own peril.
Best of Breed
So we can conclude the migration from major banking institutions already is happening, but which of these smaller players are getting more than their fair share of those funds, and which are the most investment-worthy?
There are a handful of interesting off-the-radar picks in the banking sector, but none quite as compelling as Bank Of The Ozarks (NASDAQ:OZRK), which has 113 offices and $3.84 billion in assets covering much of the southeastern United States.
At first glance, it might be tough to distinguish what might make this bank superior to its competitors. The little advantageous details, however, start to show up when you look under the hood. And that’s exactly what SNL Financial — a finance and banking research organization — did to determine that Bank Of The Ozarks was the top-performing regional bank in the nation for 2011.
As for earnings growth, the current interest rate environment makes it tough for even the most adept banking entities to generate strong margins through loan growth. However, Bank Of The Ozarks has managed to impress on the earnings growth front by mastering the art of growth through acquisitions, focusing on picking up assets on “Bank Failure Fridays” — when the FDIC shuts failing banks down and forces those accounts somewhere else. The strategy is working, too. Earnings have been growing firmly since 2010, with several beats and no misses during that span.
Another solid regional banking name investors might want to mull is Cullen/Frost Bankers (NYSE:CFR), which evaded most of the 2008 mortgage loan meltdown. The bank itself has an A+ rating, and only 1.2% of its loans are considered “non-performing” (the industry average is closer to 2% right now). Total assets are more than 30% higher than 2008’s levels.
That said, regional banks aren’t the only choice in the search for solid banking-like investments. Many attractive savings & loans firms are publicly traded too. One of them is Provident Financial Services (NYSE:PFS), which is on pace to double its 2009 per-share earnings in 2012. The 3.6% yield appeals to dividend lovers, too, and given the S&L’s rising dividend history prior to 2007, the recently raised payout might be a sign that dividends are going to start increasing on a regular basis again.
More important, Provident Financial Services actually can afford to pay the higher dividend. Earnings are projected to grow at 15% for the next three years thanks to tremendous deposit and asset growth, and net profit margins are habitually above 20%.
Ocwen Financial Corp. (NYSE:OCN) is another obscure savings & loan entity that deserves a closer look from the market. The company has been ramping up its loan portfolio since 2009, from $969 million then to $3.8 billion now, and earnings growth has followed suit. Though Ocwen won’t win any value awards based on its trailing P/E of 24.7, the number obscures the fact that the S&L is poised to grow its bottom line by more than 50% this year; the forward-looking P/E is a mere 8.7.
All the problems big banks are having? Smaller banks don’t seem to be sharing them. If anything, the numbers say the smaller banks are the cause of many of the bigger banks’ problems, simply because they’re chipping away at the large banks’ business.
Investors can fight that headwind if they wish, or they can ride the trend by shifting some of their investment dollars to the more productive fruit.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.