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As Scandals Cool, Can We Trust Banks Again?

Yes and no. Avoid the big guys, but don't overlook the little ones


With confidence about the big four banks in the toilet, customers are moving their money to regional banks. And funnily enough, it might just turn out that the little guy is the worst enemy of giants like JP Morgan (NYSE:JPM) and Citigroup (NYSE:C).

Unlike their supposedly “too big to fail” counterparts, these banks usually don’t have any exposure to sovereign debt, and they spur growth with mortgage-building and lending to small- to medium-sized businesses. That’s a much more attractive deal to consumers and investors than the seemingly unlimited risk that has come from larger banks this year.

As we’ve seen with the Hudson Bank buyout this week, there’s a lot of M&A activity going forward in the regional bank space, especially since strict new regulations are tough on smaller banks. That opens up a great opportunity for investors to get into the holding companies that are grabbing up these small banks.

New York Community Bancorp (NYSE:NYB) is one such company with 241 community bank branches, 34 commercial bank branches and 286 ATM locations throughout New York, New Jersey, Ohio, Florida and Arizona.

It provides installment loans, revolving lines of credit, cash management, online banking, automated teller machines and phone banking services. The company serves businesses, professional associations, government agencies, consumers and school districts.

NYB beat Q2 earnings expectations by approximately 15%, coming in at 30 cents per diluted share compared to a consensus of 26 cents per share. Operating earnings also rose 16% quarter-over-quarter.

Part of this increase is due to mortgage banking activity, especially in coveted New York City real estate: The regional bank has seen a significant 66% increase in mortgage banking (totaling $58 million) since last quarter due to refinancing activity.

Aside from their focus on consumers and their strong earnings, a big part of what makes NYB so attractive is what they’re not doing. The company’s lack of exposure to the volatile eurozone and avoidance of the massive derivatives trades that many large banks engage in make for less risk.

On the flip side, that means less reward, certainly, but NYB is still a stable investment with a heft dividend yield of 7.6%  — and it didn’t miss a payment once throughout the financial crisis.

Against a backdrop of huge trading losses at J.P. Morgan, the LIBOR scheme at Barclays (NYSE:BCS) and the offshore account debacle at HBSC (NYSE:HBC), it’s nice to see — and own — a financial company that actually does it right.

Bryan Perry is editor of Cash Machine, a newsletter focused on dividends and income investing.

Article printed from InvestorPlace Media,

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