Banks are among the most hated institutions in the world, seen
by many as the epitome of corporate greed. Investors have no love
to spare for banks, either. Financials were the worst-performing
sector in the S&P 500 in 2011, with losses of more than 20%,
compared with about 2% for the overall
But the sector is diverse, from big money centers such as
Bank of America (
to smaller regional banks such as
Huntington Bancshares (Nasdaq: HBAN)
. There's a big difference between these two groups, and it's not
just in their size.
While both groups are federally chartered, they operate under
different legislation. As a result, most regional banks focus on
the traditional banking activities of savings deposits and
mortgages and other loans.
They devote little, if any, resources to securitizing
, as the big banks do. Most regional banks also aren't exposed to
risky euro-zone debt or faced with the massive mortgage lawsuits of
their bigger brethren.
With little exposure to subprime mortgages, regional banks largely
dodged the debt crisis of 2008. These banks, as represented by the
SPDR S&P Regional Banking ETF (
, lost 18% in 2008. In contrast, their big-cap brethren,
represented by the
SPDR S&P Bank ETF (
, swooned with a loss of more than 47%.
Regional banks didn't fare as well as their large-cap counterparts
in 2009, however, amid concerns that the weak
market would affect their residential and commercial real-estate
loans. As of March 2010, 54% of the assets of smaller banks were
related to real estate, compared with 43% of the 25 largest U.S.
banks, according to Bruce Tuckman, author of
Fixed Income Securities
But now they are back on the radar screen and starting to
attract investor attention. Regional banks gained close to 15% in
the past three months, compared with less than 5% for large-cap
What's driving their recent outperformance? With fewer issues on
their plate than the larger money centers, regional banks are
benefitting from stronger industry fundamentals. While revenue is
being pressured by near record-low interest rates on their loans,
is picking up. U.S. Federal Reserve data for the third quarter of
this 2011 showed that business loans rose 2.4% from the second
quarter to just over $1 trillion. Consumer credit-card loans also
rose slightly (0.7%) from the second quarter.
Credit quality is also improving. Careful credit checks are
resulting in fewer delinquent loans, and banks don't need to set
aside as much money to cover bad loans, so costs are lower and
Consider Huntington Bancshares, one of the nation's largest
regional banks. A 5.3% increase in consumer loans in the third
quarter helped increase total loans and leases by 4%. The quality
of the loan book also improved, as problem loans were just 0.92% of
average loans, down from 1.98% a year-ago. As a result, loan-loss
provisions dropped from $119 million to $44 million, and
It's the same story with
Fifth Third (Nasdaq: FITB)
, two other large regionals. While these stocks have been strong
performers this year, they carry yields of less than 3%.
After a bit of digging, I found five market-beating regional bank
stocks with yields of around 5%.
Here they are...
, even after delivering double-digit returns during the past year.
Moreover, with dividend payout ratios of 80% of earnings or less,
these companies can afford to keep paying high yields. All of them
intact, without skipping a beat, during the financial crisis of
Fundamentally, the companies look healthy. All are consistently
profitable and maintain a loan-to-deposit ratio of 100% or less,
allowing them to internally generate the funds needed for loan
growth. Priced at less than 17 times earnings and less than 2.5
times their tangible
offer good value, and some offer exceptional value at today's
Risks to Consider:
Remember, these ideas are merely a good starting point for
further research. Some of these securities may make better
investments than others. You should evaluate the fundamental
characteristics of each stock in this table and assess how well it
matches your portfolio needs.
Action to Take -->
All of these stocks look worthy of further analysis, but
Commercial National Financial (Nasdaq: CNAF)
sports some of the most impressive metrics. It has delivered the
best annual total returns of the group and still enjoys yield near
It's also the fastest dividend grower in the group with a five-year
average rate of 3.3%. Its annual
dividend payout ratio
of just 46% of earnings is the lowest in the group, leaving room
for more growth. In fact, the latest quarterly dividend was hiked a
whopping 18% over the previous quarter's payout.
-- Carla Pasternak
Carla Pasternak does not hold positions in any securities
mentioned in this article. StreetAuthority, LLC does not hold
positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.