Bank stocks have been the pariah of the stock market since the financial collapse a few years back. The big banks were blamed for much of the mortgage mess and resulting economic turmoil. Conditions were so bad for many of the banking giants that only a bailout from the federal government prevented them for slipping into insolvency and crashing the U.S. economy. In the aftermath the stocks had cratered by 50%, 60% even 70% or more as losses piled up.
Although smaller banks may not have created the mess, they joined their larger cousins in paying the price of the excesses of the real estate boom. As housing prices plummeted, so did the collateral value of the loans made by regional and community banks in 2006 and 2007. Profits plummeted as banks had to set aside large amounts of capital to reserve for losses. Many banks had to slash or eliminate their dividends to preserve capital and meet their obligations.
This situation is changing quickly … and regional banks are presenting a huge opportunity.
Residential real estate is improving quickly as home sales have picked up and defaults have leveled off. Loan demand is picking up slowly but surely, and banks no longer have to add huge amounts to their loan-loss reserve accounts every quarter. The worst of the credit issues are behind them, and banks are seeing more normalized business conditions.
The fundamentals for the regional banks are improving so fast that many of them are now worth considering as legitimate growth stock opportunities. As a bonus, many of them are reinstating and raising their dividend payouts; bank stocks should be a dividend growth leader for much of the next decade.
Monarch Financial (NASDAQ:MNRK) is a good example of how strongly some bank stocks have improved. The 11-branch bank out of Chesapeake, Va., recently reported record revenues and earnings, and foreclosures are at their lowest level since 2008. Earnings for the fourth quarter of 2012 were up 93% year over year; full-year profits grew by 80%. The fundamentals at the bank have improved to the point that the stock now receives our highest rating of “A” in the Portfolio Grader stock tool.
Huntington Bankshares (NASDAQ:HBAN) is a somewhat larger operation with more than 700 branches throughout the Midwest. The bank struggled in the credit crisis as nonperforming assets leaped to more than 4%, but management has been aggressive in dealing with the situation. Troubled assets have declined rapidly and last quarter stood at just 1.15% of total assets. Huntington just received approval from regulators to raise its dividend and buy back stocks. Earnings in the quarter were up more than 30%. The stock now has a “C” rating in Portfolio Grader — not something I’d buy now, but worth keeping an eye on.
Bank stocks have been quietly become growth issues — investors would be wise to pay attention and use Portfolio Grader to find the banks with the best fundamentals.