Safety in Dollars — Regional Bank Stocks Are Flying High

by Lawrence Meyers | October 25, 2011 11:45 am

While the biggest names in finance and banking are being crushed under the weight of toxic mortgages and other funny math[1], there’s still plenty of good news from the sector — and it’s coming out of regional banks. Not surprisingly, those banks that stayed away from those pesky Alt-A loans survived the financial crisis just fine, and recent earnings reports are only proving the case.

One of my favorite companies in this arena is U.S. Bancorp (NYSE:USB[2]). The company had virtually no exposure to risky mortgages and, in my personal experience, has outstanding service at both the retail and corporate level. U.S. Bancorp’s third-quarter profit was up 40% to $1.27 billion, beating estimates by two cents per share. Net interest income is the primary driver for many regional banks, and that is defined as the interest the bank earns on its loans less what it pays for deposits (which isn’t much, in case you hadn’t noticed). U.S. Bancorp’s net interest income was up a tidy 5.9% to $2.62 billion. The market never has rewarded USB for its well-managed business, having taken the stock down 9% year to date.

Another strong performer in the sector is Fifth Third Bancorp (NASDAQ:FITB[3]). As if it were even possible to outshine US Bancorp’s numbers, Fifth Third saw net income rise 60%, to $381 million, and blew away analysts’ estimates by seven cents per share. Net interest income was up 4%. Another key metric to look for when evaluating regional banks is their tangible book value per share, the key word being “tangible.” You want to see that stable and, if possible, rising. If it starts declining, start worrying. FITB looks very strong in that regard, up 5% sequentially.

BB&T Corporation (NYSE:BBT[4]) has impressive metrics of a different sort. As a bank, you would hope people actually would deposit money and even leave it there, write checks against and generate fees off of it. BB&T is smiling, thanks to a 32% increase in average deposits, while noninterest deposits and checking increased 22% and 14%, respectively. As for net interest income, every basis point matters, and BB&T reduced the cost of its interest-bearing deposits by 7 basis points, from 0.72% to 0.65%. All of this led to a net revenue increase of 8%.

Huntington Bancshares, Inc. (NASDAQ:HBAN[5]) demonstrates the value of another metric. In this case, the expansion of its loan portfolio. A 5.3% increase in consumer loans helped drive the company’s total loans and leases by 4%. Even more importantly, the quality of the bank’s loans has improved substantially. The loan-loss provision dropped from $119 million to $44 million. Net income rose 43%.

I think these four regional banks probably are the strongest in the sector. I’d also suggest Zions Bancorporation (NASDAQ:ZION[6]), a comeback kid. The company has beaten estimates three quarters in a row, by 25, 17 and eight cents, respectively.

BB&T is the priciest, with a P/E of 15. U.S. Bancorp and Fifth Third are at 11, Huntington at 10, and Zion at 20. All pay dividends between 2% and 3%, except Zions. If I had to choose one, I’d go with USB and its 2% yield.

Those interested in diversifying an investment across the sector might want to have a look at the Regional Bank HOLDRs (AMEX:RKH[7]) ETF or iShares Dow Jones U.S. Regional Banks (AMEX:IAT[8]). The latter carries a 1.96% yield.

As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks.

  1. other funny math:
  2. USB:
  3. FITB:
  4. BBT:
  5. HBAN:
  6. ZION:
  7. RKH:
  8. IAT:

Source URL:
Short URL: