In recent weeks, Wall Street has gained an attraction for the regional banks in addition to popular money center banks such as Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C).
Two contributing factors have lead to a momentum shift for the regionals. First, we’ve seen pockets of economic strength across the United States. Increased consumer confidence has lead Americans to spend more of their paychecks, helping to fuel 2.5% GDP growth during the first quarter. Second, the housing market has exhibited a surprising recovery, driven by record-low interest rates enabling buyers to purchase homes.
Both of the factors above tie into regional banks, which have reported increased loan growth and lower charge-offs in recent months as a result of a healthier consumer and rising home prices. D.R. Horton, Inc. (NYSE:DHI), a homebuilder from which I coincidentally made a new home purchase, provided a tremendous earnings report on Friday, April 26 which gives further credence to the recovery in housing.
Image: Bank of America Corp (NYSE:BAC)
The Atlanta, GA headquartered lender has an envious footprint, with exposure to the resurgent housing boom in Florida. The Sunshine State has been one of the strongest in the economic recovery, with ample evidence of job growth and rising home prices.
SunTrust Banks, Inc. (NYSE:STI) recently reported first quarter earnings and held its annual shareholder meeting in April. Here are four reasons why the Atlanta based lender has significantly more upside:
On April 19, SunTrust reported better-than-expected Q1 results. Earnings per share rose to $0.63 for the first quarter, 37% higher than the net income earned during Q1 2012. Tier 1 capital increased to 11.20%, well above the Federal Reserve’s requirement.
Annualized net charge offs decreased to 0.76% of average loans, a decline from 1.30% and 1.38% during Q4 and Q1 2012, respectively. The lowest charge-off level in 5 years is being driven by home price appreciation and economic improvement across the Southeast, in particular Florida.
The board of directors approved a quarterly dividend increase to $0.10 per share, and a share repurchase plan of $200 million has been previously authorized. The Federal Reserve did not object to SunTrust’s capital plan for 2013 as announced with C-CAR in March.
Analysts at FBR Capital upgraded SunTrust Banks, Inc. (NYSE:STI) to “outperform” from “market perform” following Q1 results with a new $37 price target. Managing director Paul Miller believes that SunTrust’s credit quality is “getting much better, quicker than we thought” and will continue to improve even with signs of slowing economic growth.
Net interest margin (NIM) remains a challenge
While SunTrust made tremendous strides during the first quarter, challenges remain in the banking sector that are evident at both SunTrust Banks, Inc. (NYSE:STI) and its regional colleagues. In particular, the net interest margin remains a challenge at all banks across the United States, especially with the 10 year Treasury Note priced beneath 2.00%.
Mortgage interest rates at SunTrust declined faster than savings account and CD rates, causing the net interest margin to compress 0.03% from Q4 2012 and 0.16% from Q1 2012. NIM is equal to the difference between interest earned on loans by the bank and interest paid to depositors.
Due to NIM pressure across the industry, I suggest that readers only consider banks which have growth in the mortgage banking business. The Charlotte, NC based Bank of America Corp (NYSE:BAC) reported Q1 2013 earnings on April 17, and first-lien mortgage production rose a massive 57% year-over-year to $24 billion during the January – March period. Wall Street seems to have taken notice of the impressive quarter, as Morgan Stanley raised its price target on BAC to $16 from a previous $13.
The topic of mortgage banking would be incomplete without discussing Wells Fargo & Co (NYSE:WFC), the undisputed mortgage king with more loan production than any other bank. Wells also reported first quarter earnings in April, and net charge offs declined to 0.72% of average loans. This compares with a 1.05% NCO rate during Q4 2012 and a 1.25% rate during the same period a year ago–a significant improvement in 12 months time.
Wall Street also continues to view Wells Fargo & Co (NYSE:WFC) favorably. Analysts at RW Baird reaffirmed their “outperform” rating and $40 price target on the stock following earnings, and stated they would use any market weakness as a buying opportunity.
Foolish Bottom Line
In conclusion, SunTrust offers a rare combination of variables working in its favor. A strong market share position, favorable geographic footprint, and improving fundamentals warrant a closer look at this regional bank.
Furthermore, the U.S. Census Bureau predicts strong population growth in the Southeast and West as Americans move away from the Northeast and Midwest. Better year-round weather, lower energy costs and favorable tax rates (Florida has no income tax) all support Americans being on the move in this 21st century version of the Oregon Trail.
I can’t imagine a better way to play these long-term migration trends than with a uniquely situated bank such as SunTrust Banks, Inc. (NYSE:STI). Bank of America Corp (NYSE:BAC) and Wells Fargo & Co (NYSE:WFC) are also well-positioned for long-term mortgage growth and will benefit from the emerging population trends.
Thanks for reading, and consider subscribing to my posts for more Foolish ideas on outperforming the market. Fool on!
John Macris has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America Corp (NYSE:BAC) and Wells Fargo.
The article Wall Street Loves This Regional Bank With Southern Flavor originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
