|
Published: September 22, 2010
The banking industry still has a rocky road
ahead of it as it struggles to shake the hangover headache from
the financial meltdown that tipped the U.S. economy into
recession.
A quick check of the Federal Deposit Insurance Corp.'s website
paints a schizophrenic picture of the industry's health:
- The roster of failed banks this year is rising as the
credit crisis continues to play out, with 118 going under
through August, compared with the 140 that were shuttered in
all of 2009.
- The number of banks still at risk to fail increased to 11%
of FDIC-insured institutions, the agency reported recently. The
"problem" bank list is at its highest level since 1992, rising
to 829 from 775 in the same quarter the year before.
- While loan-loss reserves declined for the first time since
late 2006, nearly two-thirds of banks increased their reserves
in the period. Still, total reserves fell -4.5% or $11.8
billion, as many large banks cut back on their loan-loss
provisions.
- Yet the banking industry had $21.6 billion in profits for
the three months ended June 30th, significantly better than the
net loss of $4.4 billion in the second quarter of 2009.
FDIC Chairman Sheila Bair warned: "Given economic
uncertainties, we believe all banks should continue to exercise
caution and maintain strong reserves."
For some who invest in financial services stocks, traditionally
it's the "too big to fail" blue-chip banks or nothing. And while
the big boys are turning profits again, flying below the radar
through the maelstrom of the meltdown are some well-managed
regional banks. They steered clear of many of the problems that
got so many of their brethren, big and small, into trouble.
According to Goldman Sachs, there's been a -10% drop in bank
loans in the past two years, one of the biggest contractions
seen in more than three decades. That means banks wishing to
grow, must do so by acquiring other banks. This sets up a
scenario for takeovers and continued
consolidation, which can lead to a tidy profit for
investors.
Let's take a look at five regional banks, in no particular
order, that continue to hold their own despite the sluggish
recovery and shaky credit conditions. All generally operate in
different geographical regions:
Huntington Bancshares (Nasdaq: HBAN) is based in the
heart of the rust belt -- Columbus, Ohio -- a particularly
notable region with some solid banks showing potential for
growth as the economy recovers.
Founded in 1866, Huntington operates more than 600 banking
offices, including one in Hong Kong. However, it has stuck
mostly to Ohio and the surrounding states, and has clung to
commercial lending in troubled times -- offering a recent
commitment as a source of capital for small businesses.
The company delivered a surprise profit of $10.4 million in the
most recent quarter, and has a decent 12.5% Tier 1 capital
ratio, a measure of strength used by regulators.
Hudson City Bancorp (Nasdaq: HCBK), with headquarters in
Paramus, N.J., has 131 branches in the New York metropolitan
area. Hudson City has delivered consistent
earnings the past four quarters, and shows an attractive
dividend yield of about 5.0% and a
P/E ratio of 10.6.
Consistency is the name of the game for Hudson City, and
research during the past several years shows that reported
earnings are almost always right on target, hitting expected
estimates -- something almost unheard of given the fluid
conditions in the banking industry during the financial crisis.
Analysts appear to find the bank's loan
portfolio appealing, and the name of its primary subsidiary --
Hudson City Savings Bank -- expresses its emphasis on savings,
residential mortgages and other consumer services.
SunTrust Banks (NYSE: STI) is an Atlanta-based bank, a
super-regional with 1,675 branches throughout the Southeast. Not
exactly a tiny regional, SunTrust is the 10th-largest U.S. bank,
with $170.7 billion in assets, according to SNL Financial.
Hanging over its head is $2.5 billion in TARP money that has to
go back to Uncle Sam, so analysts have a mixed view of its
potential for investors. With the Southeast being its home base,
SunTrust has struggled with troubled loans in Florida and
elsewhere. One point in its favor is that SunTrust has lapped up
failed institutions during the past two years, broadening its
operating base and possibly positioning for the day when the
recovery really does take place and consistent economic growth
reappears.
Zions Bancorporation (Nasdaq: ZION) is headquartered in
Salt Lake City, operating 500 offices in nine states. Its Tier 1
capital ratio is about 12.6%, which is far above the 5% level
that regulators want to see.
But what happened in August? Shares declined -17% after
reporting a $135 million second-quarter loss, which came on top
of a $24 million first-quarter loss. Not pretty. And there is
$1.5 billion in TARP money that has to go back to the
government.
Many analysts who follow Zions rate the stock a "hold," with
expectations that it'll return to profitability in 2011. This
could be one to consider to buy while it hovers closer to its
52-week low than to its high.
Webster Financial Corp. (NYSE: WBS) is based in
Waterbury, Conn., and has about 180 branches in Connecticut,
Massachusetts, New York and Rhode Island. The bank returned to
profitability in the second quarter, reversing the loss seen the
year before. Revenue grew +28% and Webster reported that it
again shrank its loan-loss provisions, to $32 million from $43
million the prior quarter, and from $85 million in the year-ago
period.
Rumors have been floating all summer that Webster Financial is
primed for a takeover, and Richard Bove of Rochdale Securities
just released a list of 17 banks that could be bought out after
screening 62 banks with more than $10 billion in assets. Webster
was on his short list. One potential acquirer is First
Niagara Financial (Nasdaq: FNFG), which has made some
inroads in the Connecticut market.
With the announcement of the Basel III reforms -- which is
expected to force many European banks to raise more capital --
the verdict on long-term possible effects of the new rules on
U.S. firms is still out. The general feeling is that big U.S.
financial services companies already are in compliance on the
accord's main tenet -- a 7% Tier 1 common equity ratio, 3.5
times the current 2% requirement.
But how about our banks listed above? A Sanford Bernstein
analyst quickly upgraded Huntington and Zions, noting that
they're in compliance -- Huntington is at 12%, while Zions is at
10.5%. Hudson City Bancorp is a tad lower, at 7.6%, while
SunTrust is close to 13% and Webster Financial reported at
mid-year an improvement to 8.1%.
Action to Take --> Talk of a
double-dip recession by some analysts might scare some investors
to the sidelines, but it could be a good time to start shopping
around for well-managed, profitable banks that are operating
quietly in places like rust belt Ohio or conservative Salt Lake
City.
Trying to find the right play is still somewhat of an
unpredictable proposition. But if you use the banks listed above
as a starting point for further research, a modest position in
one or two of these names could pay off big.
-- Paul Rolfes
Contributor
StreetAuthority |
