Despite the negative reports from the media, big banks have
been popularinvestments in the past four years.
Not only did the group provide leveraged exposure to economic
growth, but they were also a good source of income, with
Wells Fargo (
carrying adividend yield close to 3% and
JPMorgan Chase (
boasting a 3.3%yield , both well above the 10-yearTreasury note
But with the recent flare-up in Cyprus, the European Union
just provided a stark warning on big bank stocks: Proceed with
After almost four years of relative stability, big bankstocks
appear to be extremely vulnerable to global economic volatility.
And that is a big risk for investors.
It's clear that bank stocks are still making huge bets despite
supposed restrictions on proprietary trading from the
Dodd-FrankWall Street Reform and Consumer Protection Act. That
was obvious when JPMorgan Chase shamefully announced a $6 billion
loss on a trade gone wild.
In addition to risky proprietary trading, big banks are also
leveraged. That's great when theeconomy is expanding, but it's
potentially big trouble during a contraction. And right now,
there are clear signals of an economic slowdown going into this
summer, with ADP's April jobs report coming in below expectations
and the MarchInstitute for Supply Management 's non-manufacturing
report showing its slowest growth in seven months.
Big banks also have more international business and frequently
carry exposure to wider global assets in less-developed and
regulated economies. That produces more volatility in thebalance
sheet for banks and their required capital levels.
But this doesn'tmean investors should abandon bank stocks
altogether. In fact, there is a great way togain the benefits of
big bank stocks without the added risk.
Regional bank stocks also provide exposure to economic growth
and pay hefty dividends. These are the types of stocks you might
find in Carla Pasternak's
. But unlike big banks, regional banks are much more
Regional banks don't have risky proprietary trading groups
making wild bets. They are usually much less leveraged than the
leadinginvestment banks. And they don't carry much exposure to
less regulated markets and securities.
When you look at the big picture, there are more than a few
good reasons why regional banks stocks look like a great
alternative to big bank stocks.
Here are four regional bank stocks with yields of as much as
From the group, I have chosen to highlight
FirstMerit (Nasdaq: FMER)
because of its strong capital reserves and
Old National Bancorp (
because of its compelling valuation.
This Ohio-based bank holding company has amarket cap of $1.73
billion, making it the largest regional bank on the
FirstMerit is benefiting from Ohio's lowerunemployment rate of
6.7%, which is below the national average of 7.7%. The bank has a
strong financial profile and appears well-capitalized. Tangible
capital is up to 8.16% from 7.86% lastyear , providing the
company with more protection against economic volatility, but a
little lessoperating leverage .
Butanalysts are stillbullish , projecting 12%earnings per
) growth to $1.40 in 2014 and annual growth of 6% in the next
five years. That's ahead of the industry average of 5%.
FirstMerit also carries a solid dividend yield of nearly 4% --
twice the 1.95% yield of the 10-year Treasury note.
Old National Bancorp
This bank holding company operates primarily in Midwest states
such as Illinois and Indiana. With amarket cap of $1.32 billion,
Old National is a midsize regional bank.
The bank has shown steady growth for the past two years,
withshares up nearly 27%. But analysts are calling for another
good year, withEPS expected to grow 13% this year to $1.07. That
has Old National trading with a forwardP/E (price-to-earnings)
ratio of 12 times, a discount to its 10-year average of 16 times
and peer-group average of 15 times. Old National also carries a
solid 2.9% dividend yield.
Risks to Consider:
Regional bank stocks suffer from higher borrowing costs
because they don't enjoy the assumption from the market that
theywill be bailed out of aliquidity orsolvency crisis. Higher
borrowing costs compress margins.
Action to Take -->
Regional banks are some of the safest bank stocks in the market
andoffer an excellent alternative to larger domestic and
international banks operating in higher-risk markets and
securities. These four regional bank stocks have strong capital
ratios and offer compelling yields. From the group, I like
FirstMerit because of its strong capital reserves and Old
National Bank because of its compelling valuation.