Make Bank on California Pride: 3 Regional Financials to Buy Now

by Will Ashworth | April 29, 2014 8:55 am

Make Bank on California Pride: 3 Regional Financials to Buy Now

SNL Financial recently took a look at the top-rated bank stocks[1] according to sell-side analysts.

BankVault185 Make Bank on California Pride: 3 Regional Financials to Buy Now
Source: Flickr[2]

While a number of the big financials thrown out there were a who’s who of big banks — Citigroup (C[3]) and JPMorgan (JPM[4]), for instance — several of the names on the list trended a bit smaller.

Specifically: California-based regional financials[5].

With the state’s economy improving combined with higher real estate prices, banks on the West Coast are once again turning the heads of analysts. California pride is back. And there’s still time to jump on this financial train.

With this in mind, here are three regional financials to buy now.

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Regional Financials: BBCN Bancorp (BBCN)

BBCNBank185 Make Bank on California Pride: 3 Regional Financials to Buy NowBBCN Bancorp (BBCN[7]) is the largest Korean-American bank in America. Ranked by Forbes as the 30th best bank[8] in America for 2014, BBCN has a whopping 86% of analysts rating its stock a “buy.”

A total of 28 of BBCN’s 49 branches[9] are located in California, with most in the Los Angeles area. That said, 33% of its $5.1 billion loan portfolio originates from outside Southern California; most of which is either for commercial real estate or corporate and/or industrial purposes.

Although Korean-Americans are its primary customers, BBCN is focused on small- and medium-sized businesses of any description. To that end, it’s currently the eighth-largest SBA lender in the country by volume.

As regional financials go, BBCN generates revenue the old fashioned way earning a spread between the interest it receives from the customer and the interest it pays for the funds it lends. As a result, its efficiency ratio[10] of 47.69% in the first quarter ended March 31, 2014, is exemplary. Its pre-tax, pre-provision (PTPP) income in Q1 2014 was $39.8 million, a return on average assets of 2.44%. While that’s its lowest rate of return over the past five quarters, it’s still better by 59 basis points than Cathay General Bancorp’s (CATY[11]) PTPP of 1.85% ($49 million in net income before taxes and provisions for loan losses annualized/total average assets of $10.6 billion[12]) in the first quarter.

BBCN is a well-operated bank. It’s easy to see why it ranks highly amongst all the financials — regional or otherwise.

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Regional Financials: First Republic (FRC)

FirstRepublicBankFRC185 Make Bank on California Pride: 3 Regional Financials to Buy NowFarther down SNLs list of analysts’ favorite banks, FRC is less about banking and more about wealth management. It currently has $45.1 billion in assets under management (AUM) with most of it acquired organically.

In the first quarter, FRC grew its wealth management assets under management by 8.6%[14] over Q4 2013 and 30.3% year-over-year. Since July 2010, its wealth management AUM have grown by 36% compounded annually. In Q1, its investment advisory fees amounted to $33.3 million — 33% higher year-over-year. This might not seem like a lot when compared to $307 million in Q1 interest income from loans, but the margins in wealth management are much higher.

Since its founding in 1985 First Republic has gone after high-net-worth (HNW) clientele by providing top-notch customer service. FRC’s approach has been so successful that its net promoter score (the number of people promoting your company less the number of detractors), according to Satmetrix, is 55%, which is three times better than its bank and financials peers.

According to an FRC study of high-net-worth markets, there are 2 million HNW households (defined as a $1 million or more in investable assets) in America. First Republic’s five core markets — Los Angeles, San Francisco, San Diego, New York and Boston — represent 55% of those 2 million households. Yet with the exception of the Bay area, where it has captured 13.5% of the HNW market, FRC has no more than 1% to 3% market penetration.

The bad news is this might never change. The good news is there’s lot of business to capture in all four of these other cities.

To me, that spells opportunity.

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Regional Financials: SVB Financial Group (SIVB)

SVBSiliconValleyBankSIVB185 Make Bank on California Pride: 3 Regional Financials to Buy NowThis final bank isn’t even on SNL’s list of top bank stocks. However, it is on Forbes’ 2014 list at No. 7, one behind First Republic. And I’ve been a big fan for some time.

In December, I picked SIVB as one of five stocks to buy for the next 20 years[16]. I just love how it services entrepreneurs in Silicon Valley and beyond. With total focus, SIVB helps businesses grow — and as a byproduct of that, it has too. Since the first quarter of 2011, its average loans outstanding[17] have grown 90% to $10.1 billion through the end of 2013, much of this growth due to venture capital innovation. Since 2009, SIVB’s earnings per share have grown over 600% thanks to substantial increases in both interest and non-interest income.

It’s not surprising then that SIVB stock has achieved an annual total return of 41% over the past five years through April 23. In every period it’s easily outdistanced its regional bank peers as well as the S&P 500. Up 7.8% year-to-date, it’s given back two-thirds of its 2014 gains in the month of April as investors worry its long run is coming to an end. While some smell fear I believe any further correction in late April and into May presents a big buying opportunity for investors.

Of all the California financials you could own, SIVB is the one I’m most excited about. Sure, it might not be on the buy list of many analysts because it has come so far, but succeeding hardly means you can’t keep succeeding.

As long as SIVB sticks to its knitting, I see happy times ahead for its shareholders.

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

Endnotes:
  1. top-rated bank stocks: http://blogs.wsj.com/moneybeat/2014/04/22/which-bank-stocks-to-buy/
  2. Flickr: http://www.flickr.com/photos/mbrand/3289161214/
  3. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  4. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  5. California-based regional financials: http://www.latimes.com/business/la-fi-california-banks-profits-20140423,0,2582457.story#axzz2znxS4bg5
  6. Next Page: http://investorplace.com/2014/04/3-regional-financials-bbcn-frc-sivb/2/
  7. BBCN: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBCN
  8. 30th best bank: http://www.forbes.com/sites/kurtbadenhausen/2013/12/19/full-list-americas-best-and-worst-banks-2014/
  9. 28 of BBCN’s 49 branches: https://www.snl.com/Cache/1500058472.PDF?Y=&O=PDF&D=&FID=1500058472&T=&IID=4055174
  10. efficiency ratio: http://www.sec.gov/Archives/edgar/data/1128361/000117184314001774/exh_991.htm
  11. CATY: http://studio-5.financialcontent.com/investplace/quote?Symbol=CATY
  12. $49 million in net income before taxes and provisions for loan losses annualized/total average assets of $10.6 billion: http://www.sec.gov/Archives/edgar/data/861842/000114420414023070/v374945_ex99-1.htm
  13. Next Page: http://investorplace.com/2014/04/3-regional-financials-bbcn-frc-sivb/3/
  14. wealth management assets under management by 8.6%: https://www.firstrepublic.com/content/uploads/Article/FRB%20Earnings%20Release%201Q%202014%20Final_1685922795.pdf
  15. Next Page: http://investorplace.com/2014/04/3-regional-financials-bbcn-frc-sivb/4/
  16. five stocks to buy for the next 20 years: http://investorplace.com/2013/12/5-best-stocks-20-years/view-all/#.U1k5qdy52bw
  17. average loans outstanding: http://files.shareholder.com/downloads/SIVB/3117473351x0x438578/440c32a3-ab4f-4e5c-a7b6-3ad6d11b11dc/Corporate_Presentation.pdf

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