It’s easy to hate bank stocks. After all, these issues were at the epicenter of all that went wrong with the economy back in 2007 and 2008. Too many bad loans tied to too much overvalued real estate. So it’s not surprising that of all the cyclical sector groups — including energy, materials, industrials and technology — financial stocks have lagged badly.
But that’s all set to change.
The combination of an improving labor market and a strengthening housing market, along with ultra-cheap short-term financing and attractive long-term investments, will work wonders for even the most beleaguered banks in 2011.If you’re looking for a leveraged way to express a positive opinion on the future of the economy — look no further than Zions Bancorporation (NASDAQ: ZION).
Zions sits at the very center of the real estate blast zone, with a majority of its operations concentrated in Nevada, Arizona, and California. It’s one of the larger regional banks in the United States with $50 billion in assets. ZION stock was hit hard by the housing bubble and hasn’t been profitable since the second quarter of 2008. Carrying a total of $2.1 billion in non-performing loans (or 5.9% of total loans), the company posted a loss of $80 million dollars last quarter.
Yet things are improving — and as they do, the company’s exposure to some of the fasting growing regions of the economy will transition from a liability to an asset. Analysts expect Zions to return to profitability in the second quarter of 2011 and earn $88 million or 38 cents per share. This is up from a loss of $9.92 per share in 2009 and an anticipated loss of $2.16 per share for 2010.
The key will be loan performance. Nonperforming loans fell by $200 million between Q3 and Q2. And during its latest conference call, company management noted that special mention loans — a good indicator of early credit problems — fell by -17% sequentially, building on the -6% decline in the second quarter.
With early stage loan delinquencies falling, the bank will be able to continue releasing its loan loss reserves and boost its bottom line. That’s exactly what he bank’s been doing over the last two quarters as credit quality has stabilized throughout its loan portfolio. Despite this, the company’s maintains reserves equal to 4.1% of loans compared to a peer average of 3.5%.
In addition, Zions has been steadily stabilizing its capital base with its total capital ratio not at 16.5%, up from 11.7% in 2007 and above the peer average of 15.9%.
Overall, the company has managed through the worst credit downturn in a generation and is now ready to benefit from the rebound.
Check out the other FREE stock picks that make up InvestorPlace.com’s Top 10 Stocks for 2011.
Anthony is the editor of the investment advisory service, The Edge. As of this writing, Anthony was recommending ZION in this newsletter. A special free trial is available for InvestorPlace.com readers with the user name: trial; password: edge. Contact him at [email protected] or comment below.