Don't Overlook the Local Banks
) recent $2 billion-and-counting trading loss should justifiably
make you wary of the big banks. The black-box nature of these very
large banks makes their business model inherently risky and
unpredictable. But you don't need to shun this entire space simply
because of these large banks. There are plenty of other operators
in the banking space -- mostly the small local/regional players --
that remain in very good shape.
As the economy continues to improve and the bad loans made
during the downturn roll off, the condition of the banks' balance
sheets has improved. Consumer delinquencies have been falling as
the slowly improving jobs market has been helping heal household
finances. Some of the reserves that banks had set aside for bad
loans now seem excessive, and those reserves are being released,
and less new money has been put aside.
Free raw materials (deposit rates near zero) have made the loans
that the banks have been making recently very profitable. As a
result, many small banks, which don't face many of the problems of
the big guys, have been showing surprisingly positive earnings. As
a result they are performing very positively on the Zacks Industry
Zacks Industry Classifications
Our expanded industry classifications provide a fairly granular
view of the industries by tracking more than 250 different groups.
The Zacks Industry Rank, which derives its predictive power from
the time-tested Zacks Rank, helps us identify the industries that
are expected outperform others. The top 1/3
of the Zacks Industry Rank qualify as industries with 'Good'
prospects, the bottom 1/3
have 'Bad' prospects, and middle 1/3
But many of these 'industries' have just a few companies in
them. So it's not particularly noteworthy if a single small
industry shows up doing well; a single firm with good news can
propel a one- or two-firm industry to the top (or bottom) of the
It is interesting when you see a cluster of similar industries
close to the top of the list. The same holds true for the bottom of
the list. The definition of size that matters here is not the total
sales or market capitalization, but the number of companies in the
Breaking Down the Groups
We break up the overall banking sector into five regional
groupings, plus a "multi-regional" group that is mostly the very
large banks like J.P. Morgan,
Bank of America
). We also have a separate "industry" for the foreign banks.
Four of the five regional groupings are all showing up in the top
of all industries, meaning having a 'Good' outlook. The remaining
one, banks in the Northeast, falls in the middle 1/3
-- a 'Neutral' outlook. The 'multi-regional' group of large
banks is also in the top third.
The Southwest region 'industry,' with 12 firms in it, is the
strongest of the bank groups, coming in 11th place.
Texas Capital Bancshares
) is a Zacks Rank #1 stock in this group. The Southwest group is
the smallest of the regional groups and probably the reason it is
the best regional grouping. Normally industries in the top 15 have
fewer than ten firms in them.
Banks in the Midwest are the next best, in 15th place. The
Midwest 'industry' has 35 stocks in it. Rosemont, Illinois-based
Taylor Capital Group
), the $400 million market cap parent of Cole Taylor Bank, is one
of the Zacks Rank #1 stocks in this group.
Banks in the West are at the 54
place, while the Southeast region is close to the cut-off for the
mark at 78
place. Banks in the Northeast are firmly in the 'Neutral' category
Lesser Known, but Not Lesser Investments
You probably have never heard of most of these banks. Some of them
you might recognize if they happen to operate in your town, but it
is a fair bet that the names of most of them are new to you.
None of the banks on either of the lists are large caps, and
even the mid-caps are on the small side of the range. One could
actually take a 'package approach' to investing in these banks. You
can create a 'synthetic' national bank -- one that avoids the
regional risk that these banks pose -- by having a portfolio made
up of small positions in many of these names, rather than just
taking one normal-sized position. Given the thin trading volumes in
these names, even an individual investor could impact the price if
they tried to take a big portion in just one of these names.
The valuations are for the most part reasonable; not rock
bottom, but by no means excessive. And unlike the big boys of the
banking world, most of these firms are free to pay whatever
dividends their boards deem appropriate. As you can see, many of
these small banks provide very attractive dividend yields.
Dividends from some like Ohio's
First Community Bancshares
Community Trust Bancorp
) are really juicy.
However, just as a word of warning, they tend to be thinly covered,
so an individual analyst raising his or her numbers for the firm
has a much bigger impact on the mean estimate than is the case with
the big, well-covered banks. Still, higher earnings will allow
these banks to pay higher dividends in the future, so if you do buy
them and tuck them away, there is a very good chance that your
yield on cost will be much higher a few years down the road than is
indicated in the tables below.
Zacks # 1 Rank (Strong Buy) Local Banks
Mkt Cap (mm)
Div Yield %
|Access Natl Cp
|Bank Of Ky Finl
|Bofi Hldg Inc
|Bridge Cap Hldg
|Central Pac Fin
|Farmers Cap Ky
Zacks # 1 Rank (Strong Buy) Local Banks
Mkt Cap (mm)
Div Yield %
|Bank Of Hawaii
|Bok Finl Corp
|Commun Trust Bc
|First Bus Finl
|First Comm Bcsh
|First Commty Cp
In evaluating the Zacks Industry Ranks, you want to see two things:
a good overall score (low, meaning more Zacks #1 and #2 Rank stocks
than #4 or #5 Rank stocks) and some improvement the relative
position from the prior week. It is also helpful to understand
exactly what the Zacks Industry Rank is.
The Zacks Industry Rank is the un-weighted average of the
individual Zacks ranks of the firms in that industry. It does not
matter if the stock is the 800-pound gorilla that dominates the
industry or some very small niche player in the space -- they have
the same influence on the Industry Rank.
Also, that means that the bigger the industry in terms of number of
firms, the less influence any given company has on the industry
rank. It also implies that small industries, with just two or three
firms, should be the ones found at either the top or the bottom of
the list. Thus, I do not always focus on the very highest-rated
industries, but on the highest-rated ones in which there are a
large number of firms.
BANK OF AMER CP (BAC): Free Stock Analysis
CITIGROUP INC (C): Free Stock Analysis Report
COMMUN TRUST BC (CTBI): Free Stock Analysis
FIRST COMM BCSH (FCBC): Free Stock Analysis
FIRSTMERIT CORP (FMER): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
TAYLOR CAP GRP (TAYC): Free Stock Analysis
TEXAS CAP BCSHS (TCBI): Free Stock Analysis
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