The U.S. unemployment rate fell below 6% for the second consecutive month, the economy posted two consecutive quarters of strong GDP growth, the market recorded the longest consecutive daily decline in gas prices since 2008 and consumer sentiment is on a clear upward trend heading into Q4. Is it time to buy regional bank stocks?
With increasing mortgage compliance requirements being imposed on all lenders, regional banks have the opportunity to profit from any improvement in housing via home inventory turnover or home improvement loans as many non-bank lenders have left the market. This economic backwind will be most prevalent at regional lenders with strong balance sheets, good efficiency and access to deep deposit bases.
Here are regional bank stocks to buy into 2015.
East West Bancorp, Inc. (EWBC)
Based in California, East West Bancorp, Inc. (EWBC) has 119 U.S. branches primarily on the West Coast, but also maintains a presence in China. East West Bancorp is a regional bank stock to buy as it has shown good organic growth, prudent acquisition activity with the purchase of Metrocorp Bancshares earlier this year and holds a strong position in the Chinese-American demographic market.
EWBC has also remained efficient with non-interest expense to revenue in the low 50% range compared to industry norms ranging from 65%-75%.
East West Bancorp is not cheap with a price-to-earnings ratio (P/E) of 16, and a price to book of 1.9. EWBC’s dividend yield is a lower-than-average 2% with a payout ratio of 30%. The analyst consensus price target is currently $41 with a price/earnings-to-growth ratio of 1.91. Even at this price, with the closing of the Metrocorp acquisition, the bank’s ability to control costs and its exposure to the southern California real estate market, it is a bank stock to buy.
Huntington Bancshares Incorporated (HBAN)
Huntington Bancshares Incorporated (HBAN) is a midwestern regional company. The untimely acquisition of Sky Financial in 2007 for a steep price of 1.7 times book value resulted in significant loan losses, which kept the bank in recovery through 2010. Since then, Huntington has performed quite well compared to peers.
Huntington Bancshares is a regional bank stock to buy because of its focus on organic growth, increased market share and strong capital position.
Although expanding with its acquisition of Camco Financial earlier this year and the acquisition of 24 Bank of America (BAC) branches in September, Huntington is aiming to close 26 of its own branches by the end of the year. This branch realignment helped produce a 10.33% return on equity on a trailing 12-month basis. Huntington’s non-interest expense as a percentage of revenue has remained constant at 65% and the bank has worked to grow a strong auto finance unit that has the ability take advantage of a growing economy.
Huntington’s consensus price target is $10.75 offering a small premium to its current trading range, with a P/E of 14.3 and a price-to-book of 1.4. Huntington recently hiked its dividend 20% (or 6 cents per share), which increases its dividend yield to 2.4%, a nice show of confidence.
SunTrust Banks, Inc. (STI)
SunTrust Banks, Inc. (STI) is super-regional bank serving 11 states with a focus on Florida, Georgia, Virginia and Tennessee. SunTrust is well-diversified with three primary lines of business: consumer banking and private wealth management, wholesale banking and mortgages. SunTrust is a regional bank stock to buy because it is undervalued compared to its market potential. STI has a P/E of 12.1, a price-to-book of 1.0 and PEG ratio of .69. Analyst consensus stock price target is $43, compared to a current trading range in the high $30s.
SunTrust has an efficiency ratio of 62% in the most recent quarter, and has a portfolio of other businesses that help produce non-interest revenue equivalent to 39% of total revenue for the third quarter of 2014. This makes it a good hedge against other banks that are more dependent on rising interest rates to increase margin. This is not to say that the bank would not benefit significantly from rising rates, but in a market environment that assumes a flat yield curve but an increase in mortgage activity and consumer spending SunTrust still should be able to continue to produce positive results.