It's easy to see the appeal of banking stocks. Many of them
sport low price-to-earnings (P/E ) ratios while trading below
tangiblebook value . My favorite bank stock --
Citigroup (NYSE:
C
)
-- for example, still trades for just 57% of tangible book and less
than seven times projected 2013 profits, even after a recent 20%
gain during the past month.
Yet many major banks, with operations across the globe, still
remain vulnerable to shockwaves emanating from Europe and
elsewhere. That's why they are so cheap. When the global risks fade
away, these banks could post a huge rally.
If you can't stomach the risk that these big banks bring, then
why not focus on the next tier? Regional banks possess many of the
same traits as the large banks, but often have zero foreign
exposure.
In the second quarter, the five regional banks in the table
below all exceeded consensus forecasts, highlighting the fact that
operations are a bit stronger than analysts have given them credit
for. They all trade for less than 10 timesearnings , making them
inexpensive in terms of trailing profits and book value. It's worth
noting that all are capable of stronger earnings once the
housingmarket and the broadereconomy perk up.
The Regionals Remain Inexpensive
Meanwhile, most trade for around book value, well below the
1.5-2.0multiple to book that regional banks garner in a normalized
economic cycle. The keyprofit drivers to come: rising lending
activity, a reduction innonperforming loans and an expansion in net
interest margins as interest rates revert back to historical
norms.
Craig Siegenthaler, who follows regional banks for Credit
Suisse, says a rebound is already underway. He has found that the
number of nonperforming loans at many banks has been steadily
dropping. More important, lending activity appears to be picking
up, especially as it relates to the housing sector and small
business capacity expansions. "This tells us that pockets of
construction demand are beginning to emerge," notes
Siegenthaler.
My colleagues have already given some solid ideas if you are
looking for high-yielding regional bank stocks. Amy Calistri, the
face behind StreetAuthority's
The Daily Paycheck
, profiled this group back in February, while Carla
Pasternak, editor of the
High-Yield Investing
advisory, took note of these regional bank stocks back in
January.
But if you're talking about the biggest regional banks, then it
becomes a challenge to single out a specific stock, as they tend to
trade in tandem on the backs of broader sector interest. That is to
say, a rising tide will eventually lift all boats.
That's why anexchange-traded fund (
ETF
) investment makes more sense. Regional BankETFs give you exposure
to the whole group without the need to track lending activity at
one particular institution.
A pair of choices
Though there are a number of ETFs that have some degree of exposure
to regional banks, a pair of them provide the most direct access to
the leading regional banks
.
1. iShares Dow Jones U.S. Regional Banksindex (NYSE:
IAT
)
This is a cap-weighted fund, which means that the bulk of its $95
millionasset base is tied up in bigger regional banks. For example,
the top 10 holdings account for 64% of the fund's portfolio, led by
U.S. Bancorp, which accounts for 21% of the total fund.
2.SPDR S&P Regional BankingETF (NYSE:
KRE
)
The big drawback of the iShares fund is the 0.47% expense fee,
which can eat into profits for investors looking to trade in and
out of the ETF. The SPDR S&P Regional Banking ETF carries a
slightly more reasonable 0.35%expense ratio and provides better
access to a broader spectrum of regional banks and not just the
biggest players. For example, the average holding in the iShares
Dow Jones fund is valued at about $10 billion, while the typical
SPDR fund holding is just $2 billion. In fact, more than
three-fourths of the 71 holdings are considered to be small-cap
banks, according to Morningstar. Still, it's a relatively large
fund, with more than $1 billion in assets in the fold.
Risks to Consider:
The U.S. economy appears to be weathering the global storm in
decent shape, but a broader global economic meltdown would surely
affect the U.S. economy, which would dampen results at these
regional banks.
Action to Take -->
This is a multi-year play. The regional banks have spent the past
few years getting their houses in order after the GreatRecession
that began in 2008. Now, they are in shape and poised to generate
further profit gains as the economy strengthens. Right now,
analysts aren't looking for big profit spikes in 2013, largely
because the economic outlook for the United States remains a bit
murky. But whether the U.S. economy lifts this group's results in
2013 or 2014, you shouldn't wait too long as these stocks (and
ETFs) already represent solid value at current levels.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.