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Regional Banks Are the Strength of the Industry

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bank of America (NYSE: BAC) and Citigroup (NYSE: C) have been two of the most followed and controversial stocks in the market over the last year. The rise in housing and strong market performance has led some to believe that now is the time to buy these large money center banks. However, Thursday proved one point: Regional banks are the strength of the banking industry.

Bank of America fell more than 3.5% while Citigroup fell over 3% after announcing Q4 earnings. These highly complicated companies had both strengths and weaknesses in each quarterly report, yet because of large returns over the last year and several concerns within the earnings report, both traded lower.

Bank of America beat its bottom line expectations by $0.01 while posting revenue of $18.89 billion, a $3.51 billion miss! The company saw a decline in net interest margins, much like JPMorgan, and now faces reduced provisions and fears of additional lawsuits.

Citigroup grew its top-line by 8% year-over-year, yet still missed expectations by almost $1 billion. The company's EPS of $0.69 was short $0.27 of expectations as the bank adjusts to new regulations and a new CEO. Citi's miss was arguably worse than BofA's -- Mike Mayo noted that the reserve release added $0.02 to EPS compared to $0.19 last quarter. This large distinction has left a lot of investors curious as to what the future might hold for the operations of this bank.

While the large money center banks were frustrating analysts and losing value during the trading day on Thursday, regional banks were greatly outperforming the market with large gains following earnings. PNC Financial Services (NYSE: PNC) rallied 3.8% after posting revenue growth of 15% and EPS of $1.24. The company's bottom line actually missed expectations by $0.17, but when removing the value from the company selling its shares of Visa and the charge for the foreclosure-abuse settlement, PNC actually beat expectations by $0.16. Furthermore, while large banks were seeing a decline in book-value-per-share, PNC's rose from $61.52 to $67.05.

BB&T (NYSE: BBT) is my personal favorite of the banking stocks, and the company saw its earnings rise 29% in the fourth quarter; it also beat revenue expectations by $70 million. As a result, the stock was higher by more than 2%, adding to its recent rally. Fifth Third (NASDAQ: FITB) rose more than 4% after its EPS of $1.66 represented a 41% rise year-over-year; the company's book-value-per-share also rose 10% year-over-year. Lastly, Huntington Bancshares (NASDAQ: HBAN) traded higher by over 3.5% after growing its earnings by 18% year-over-year, and its revenue by 6%.

The performance of regional banks compared to money center banks shows a clear advantage for the regional banks, indicating that regional banks are profiting from the recent strength in housing. Over the last year investors have bought large banks following strong housing and consumer confidence data, but perhaps investors have been wrong.

As we move forward in a market with daunting questions in the immediate future, investors must remember that large banks are still highly exposed to Europe. Also, regional banks have had the best ratings when it comes to consumer satisfaction, and earnings indicate that consumers are electing to utilize smaller banks.

The sector as a whole remains undervalued, as almost every stock in the space trades below or equal to its book-value-per-share. Therefore, an investment decision should be determined by growth and possibly market sentiment. In my opinion, a shift is beginning, as investors realize that regional banks are the strongest in this space. In 2013 I'd watch for strong gains from this space, while large money center banks lag behind after a great run in 2012.


BrianNichols owns BBT. The Motley Fool owns shares of Bank of America, Citigroup Inc , Fifth Third Bancorp, Huntington Bancshares, and PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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