International Bancshares Corp (IBOC), Hancock Holding Company (HBHC), BankUnited (BKU): Buy Small Banks For Big Profits

Recovery in real estate

During the meltdown of the mortgage industry, Florida was one of the most severely damaged real estate markets in the nation. A lot of banks and mortgage lenders in that area went bankrupt; one that didn’t was BankUnited (NYSE:BKU). I had a friend who was fond of saying that anything that doesn’t kill you makes you stronger. That seems to be the case with BankUnited (NYSE:BKU). The shares currently pay a very attractive yield of 3.33%, requiring a payout ratio of only 38%. This relatively low payout should make the dividend very safe. In addition, the five-year projected growth rate of 7.2%, coupled with the dividend payout, should be able to produce annual returns just over 10% per year.

Florida real estate prices seem to have bottomed out last year and are in a solid upswing at this time. This makes asset-secured lending in Florida very safe, as it is based on depressed appraisal values and made against rapidly appreciating assets.

Profitable conclusions and actions

An objective assessment of risk/reward potential would seem to rank International Bancshares Corp (NASDAQ:IBOC) the safest of the three with the most upside potential, given the prospects for a rise in the price to book ratio and the economic activity being driven by the oil and gas boom underway within the region. This stock is screaming to be purchased at the current level.

Hancock Holding Company (NASDAQ:HBHC) is priced in line with International, but in a region with slightly less secure prospects for economic growth. This assessment places it solidly in second place in regard to the risk/reward calculation.

BankUnited (NYSE:BKU) carries the highest current valuation of the three, and, in my opinion, has the least upside potential. This is not meant to imply that it would not make a good investment. I just don’t see it as the best option available in the sector at this time.

The article Buy Small Banks For Big Profits originally appeared on Fool.com and is written by Ken McGaha.

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