When it comes to the stock market, bigger isn't always
Everyone heard the phrase "too big to fail" during the most
recent financial crisis. The phrase referred to financial
institutions that are so large and interconnected that they have
become critical cogs in the economy. The idea is that if a "too
big to fail" institution were to falter, it could bring down the
entire financial system. Therefore, the government needs to step
in to help prop up the failing company to prevent systemwide
Large banks are being pressured by multiple sources to
decrease their size. For example, Federal Reserve Chairman Ben
Bernanke has called "too big to fail" banks a moral hazard, and
Mervyn King, the former governor of the Bank of England, has
suggested large banks be cut down to size. Former Fed Chairman
Alan Greenspan has said that large banking institutions should be
broken up by regulators because taxation and fees aren't
sufficient to control their influence and growth.
It's not just the "too big to fail" syndrome that hangs over
large banks, as readers of my recent article on the 10 most
vulnerable retail banks are aware. A study by management
consulting group CG42 estimates that the 10 retail banks with the
greatest numbers of frustrated customers will lose a combined $92
billion in deposits and $5 billion in revenue over the next
Top 10 Retail Banks By Vulnerability
Although these numbers are only projections, the fact remains
that many customers of large banks are not happy with their
institutions -- and the money pulled out of these banks by
dissatisfied customers needs to go somewhere. The obvious
destination for these funds would be smaller regional
This idea led me to look into the regional banking sector --
and what I discovered impressed me enough to dig deeper and name
my favorite regional bank stock.
I first looked at the
SPDR S&P Regional Banking ETF (
, which is a representation of 78 regional bank stocks. Up 18%
this year, this exchange-traded fund is a quasi-equally weighted
fund with no single name having an allocation of more than 1.98%.
The primary drivers for the regional bank's performance have been
an improving economy combined with the potential for rising
Banks borrow at lower short-term rates and lend at long-term
rates, locking in profits. In other words, the yield curve is
steepening with interest rates, which is creating a perfect
environment for banks to profit.
Like regional banks, large banks are also poised to benefit
from the recovering economy. However, large banks have heavy
headwinds like the "too big to fail" dilemma and a large number
of unhappy customers. Therefore, I see regional banks as the
better long-term play.
My favorite regional bank stock is
Bryn Mawr Bank Corp. (Nasdaq: BMTC)
, parent of the Bryn Mawr Trust Co. Founded in 1889, this Bryn
Mawr, Pa.-based company operates 19 branch offices. For the
quarter ended June 30, the bank reported record results of $6.3
million in net income and 46 cents in diluted earnings per share,
which compares with net income of $5.3 million and diluted EPS of
40 cents a share in the same period last year.
Bryn Mawr Trust recently acquired Davidson Trust and the First
Bank of Delaware, which has helped increase earnings. Interest
income increased 12.7% during the quarter from $15.9 million in
the same period last year. Revenue from wealth management grew
26% to more than $9 million.
As you can see, this little bank is rapidly growing. In the
technical picture, shares have been tearing higher since July 1.
The price has broken out on the upside after two separate
Risks to Consider:
The primary risk with regional banks is the economy. The
recovery may slow, and interest rates may stop climbing. Although
I firmly think the sector and particularly Bryn Mawr Trust makes
solid investing sense right now, anything can happen. Always use
stop-loss orders and position size wisely when investing.
Action to Take -->
I like Bryn Mawr Trust right now as a momentum purchase. My
target price is $35 a share within the year.
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