Standard & Poor’s has a positive outlook for regional banks, as do I. These banks tend to have less exposure to international concerns and also are purer plays on deposits and consumer/small business economic health, whereas the exposure of mega-banks can be susceptible to trading and other “unplanned” losses.
S&P expects that regional banks will see an 8% increase in net income on flat net revenues, on the back of a 2.0% increase in net interest income. The regional segment of banks also appears to be well-capitalized according to S&P, with an average Tier 1 capital to risk-weighted assets ratio of 12.5% at year end.
My Top Picks
Regions Financial Corporation (NYSE:RF) and BB&T Corporation (NYSE:BBT) appear to be two of the best positioned regional banks in the industry, both having their own respective strengths. Although Regions won’t make you rich with dividends, with a current dividend yield of 0.5%, it does have room to grow via both geographical and multiple expansion. Regions operates throughout the South, Midwest and Texas, and also trades at the lowest price to book ratio of the five stocks listed at 0.75 times. The bank also boasts the lowest debt to capital ratio at 32%.
Regions grew its net interest margin to 3.10% in the fourth quarter, which is still pretty positive when comparing the sub-3% net interest margin of major banks like Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM). Although Regions is a relatively unknown bank, it ranks tenth in domestic deposit market share, owning 1.54% of the market.
BB&T Corporation (NYSE:BBT) is one of the more expensive of the five banks with a price to book ratio of 1.11, but it does pay the highest dividend yield at 3.1%, which also happens to only be a 28% payout of earnings. BB&T also commands a 3.9% net interest margin and 67% efficiency ratio, which are both either in line or tops in the industry. The bank has managed to gain 30 basis points in market share over the last five years, now owning 1.83% of the deposits market share, compared to 1.53% in 2007.
BB&T Corporation (NYSE:BBT) also has an impressively diverse revenue mix, with higher fee income from insurance brokerage services, life insurance, wealth management, and specialized lending. BB&T’s big advantage is its dividend yield. Earlier this year the company upped its dividend payment by 15%.
BB&T had much less hedge fund interest at the end of 2012 than Regions, with a total of 27 funds on the long side, but an increase of 17% from the third quarter. This bank, however, has managed to attract impressive hedge fund owners, including billionaires D.E. Shaw, Steve Cohen and George Soros (check out other hedge fund action in BB&T).
Honorable Mentions
All three of the regional banks below saw marked growth in EPS year over year for 2012, signaling a potential industry turnaround. Huntington Bancshares Incorporated (NASDAQ:HBAN) is a multi-state diversified regional bank holding company, operating The Huntington National Bank. Although Huntington’s solid balance sheet, with a 34% deb to capital ratio, makes it appealing, the bank is the most expensive of the five — carrying a P/B ratio of 1.12.
Huntington Bancshares Incorporated (NASDAQ:HBAN) didn’t see as impressive growth year over year in EPS during the fourth quarter. Its 4Q EPS came in at $0.19, compared to the same quarter last year of $0.14. This comes after a third quarter that showed disappointing loan growth, but growth rebounded in the fourth quarter. As well, for the fourth quarter results, nonperforming loans fell 9.5% from the third quarter and 28% from a year ago.
SunTrust Banks, Inc. (NYSE:STI) is another major regional that pays a small dividend like Regions, yielding 0.7%, but it’s also on the cheap side of the industry with a P/B of only 0.75. However, unlike Regions’ relatively low debt to capital ratio, SunTrust Banks, Inc. (NYSE:STI) is at 42%.
Fifth Third Bancorp (NASDAQ:FITB) operates in twelve states throughout the Midwestern and Southeastern U.S. This bank is in line with BB&T on a debt to capital (51%) and P/B basis (1.06). Like many of the other banks, Fifth Third also posted a strong fourth quarter. The bank managed to post 2012 EPS of $1.66, compared to the $1.18 for the same quarter last year, with mortgage banking driving fee income. Yet, its net interest margin fell 0.07% from the third quarter. However, many of Fifth Third’s recent earnings results have been elevated (artificially) by releases of reserves. What’s more is that Fifth Third Bancorp (NASDAQ:FITB)’s year-end Tier 1 capital ratio was 10.65%, which is below major peers.
Don’t Be Fooled
| Regions | BB&T | Huntington | SunTrust | Fifth Third | |
| Price to book | 0.75 | 1.11 | 1.12 | 0.75 | 1.06 |
| Debt capital | 32% | 51% | 34% | 42% | 51% |
