Regional banks, which offer financial services to a particular region of the United States, may be a great place to look for investors interested in well-run, dividend-paying banks. In fact, there happen to be two regional banks whose stress-test results were appreciably better than their bulge-bracket peers. You may not know much about KeyCorp (NYSE:KEY) or Fifth Third Bancorp (NASDAQ:FITB), but if you’re interested in investing in the financial sector, you’d do yourself a service to dig deeper into these regional banks.
Passing with flying colors
The stressful circumstances of the recently completed stress test included unemployment rate reaching 12.1%, home prices plummeting nearly 21%, severe recession in the U.S., Europe and Japan leading to about 50% fall in equity prices, along with the U.S. GDP falling 6.1%. In all, the group of banks included in the Fed’s exercise would lose $462 billion in a downturn incorporating all of these factors. The Fed had set the Tier I common capital ratio, which measures a bank’s high-quality capital as a share of risk-weighted assets, at 5% or above to clear the current stress test.
While America’s largest financial institutions showed Tier 1 common ratios between 5% and 6%, KeyCorp (NYSE:KEY) came in with a Tier 1 ratio of 8%. All told, the bank has projected losses of about $2.4 billion should the dire circumstances posed by the stress test come to fruition. Fifth Third fared even better, with a Tier 1 common ratio of 8.6%. Furthermore, Fifth Third Bancorp (NASDAQ:FITB) would only lose $300 million under the Fed’s testing scenario.
KeyCorp (NYSE:KEY) operates as a holding company for KeyBank National Association that provides various banking services in the United States. KeyCorp (NYSE:KEY) has a compelling valuation, trading for only 10 times trailing earnings. Furthermore, the stock trades for a price-to-book ratio of only 0.88. The company raised its dividend by 67% in 2012, and currently yields 2%. KeyCorp (NYSE:KEY) reported full-year 2012 total revenues increased nearly 4%, including a 10% increase in total revenues in the fourth quarter year over year.
Fifth Third Bancorp (NASDAQ:FITB) is a $14 billion regional bank that trades for only 10 times its trailing earnings per share and offers a dividend yield near 2.5%. In January, Fifth Third Bancorp (NASDAQ:FITB) posted fourth-quarter earnings of $.43 per diluted share, up 30% from the same quarter the year prior. In addition, the bank reported full-year earnings of $1.5 billion, or $1.66 per diluted share, up 41% compared with 2011’s results of $1.1 billion, or $1.18 per diluted share.
A high-yielding alternative
New York Community Bancorp, Inc. (NYSE:NYCB) is a $6 billion regional bank offer banking products and services in New York, New Jersey, Ohio, Florida, and Arizona. The company pays $1 per share in dividends annually. As a testament to the company’s solid financial position, the company did not have to cut its dividend during the depths of the 2008-2009 financial crisis. The dividend is nothing to sneeze at—at recent prices, the stock has a huge yield of more than 7%. New York Community Bank reported fiscal fourth-quarter and full-year adjusted earnings that both increased by a penny per share versus the prior year.
Bank on gains for the foreseeable future
Die-hard income investors may prefer New York Community Bancorp, which is well-run in its own right. The bank pays a dividend yield triple the yield on its two peers, and the dividend was maintained throughout the dire days of the financial crisis. The bank is modestly valued, exchanging hands for a trailing P/E of 12 and trades only slightly above book value.
For investors interested in a mix of dividends and strong growth potential, KeyCorp (NYSE:KEY) and Fifth Third Bancorp (NASDAQ:FITB) are ripe for the picking. These two excellently managed financial institutions have shown admirable performance digging out of the worst financial crisis our country has seen in decades. Credit trends continue to improve and these two banks’ Tier 1 ratios, even under dire circumstances, remain favorable.
The operating performance of these two banks speaks for itself. Both companies are reporting increasing profits, even under difficult conditions presented by the current low interest rate environment. Furthermore, both banks pay investors a dividend yield competitive with the broader market, and with the solid results from the stress test, are poised to continue providing compelling returns to investors in the future.
The article Two Stress-Test Winners That May be Flying Under Your Radar originally appeared on Fool.com and is written by Robert Ciura.
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