1 Healthy Bank To Buy, 2 To Skip Out On This Year

By Christopher French - January 25, 2012 | Tickers: BOH, KEY, RF | 0 Comments

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As more banks release earnings, an some a couple trends have emerged. First, banks that truly struggled in the recent recession continue to struggle, while those who got through the 2008 – 2009 period unscathed continue their winning ways. Second, margins are under real pressure, and the Federal Reserve's “twist” program, along with anemic economic growth, are likely to subdue margins for all of 2012.  I will look at one healthy bank, and two not so healthy ones, to see how these trends play out.

Bank of Hawaii, Inc. (NYSE: BOH)

Hawaii's largest bank released earnings that were in line to slightly above Street estimates, but well off the year ago earlier levels. Bank of Hawaii's stock fell nearly 2% in response. Had Bank of Hawaii not been such a solid performer historically, Wall Street might not have reacted so rationally. It is the nation's 56^th largest bank, with about $13.4 billion in assets.

Bank of Hawaii stock was trading recently at about $47 per share, which is still near the high end of the 52 week range of from $49.26 to $34.50. It has a 12 month trailing price to earnings ratio of 13.8, and has a market capitalization of almost $2.2 billion, and pays a quarterly dividend of $0.45 per share, for a yield of 3.8%

In the fourth quarter, Bank of Hawaii posted earnings of $39.2 or $0.85 per share for the quarter, and for all of 2011 it recorded earnings of  $160 million, or $3.39 per share. In the 4^th quarter of 2010, Bank of Hawaii posted profits of $0.84 per share, and $3.80 for all of 2010. Over the course of 2011, loans grew about 4%. However, many of Bank of Hawaii's secondary numbers took a step back in the 4^th quarter. Its return on assets in the quarter was 1.17%, and for the year, 1.22%, both low by Bank of Hawaii's historical standards. The return on assets was 1.45% in 2010. The bank's efficiency ratio was 0.604 in the 4^th quarter of 2011, and 0.569 for all of 2011. These compare with an a average 0.523 for all of 2010.

Bank of Hawaii seems to have more money on hand than it knows what to do with. Loans outstanding at the end of the 4^th quarter were $5.5 billion, or just 41% of assets. It makes it hard to earn a lot of money when less than half the assets are being put to work. The net interest margin in the 4^th quarter of 2011 was just 3.04%. For comparison, for full year 2010 the net interest margin was 3.41. Like many regional banks, its non interest income suffered due to the Durbin Amendment.

Bank of Hawaii is in the midst of a share repurchase plan, which will support the stock in 2012. Beyond that, a growing world economy will support the Hawaiian economy, as tourism is that state's leading industry.

The mean analyst recommendation for Bank of Hawaii is a fairly pessimistic 2.9. I think more highly of this bank than that, and see it outperforming the regional banking sector over the next several years. There is significant room for margin and efficiency expansion, and it sports a generous dividend. Growth and income investors should take note.

KeyCorp (NYSE: KEY)

Cleveland based Keycorp is the nation's 21^st largest bank, with 1,058 branch offices scattered throughout the northern tier of the country, and $88.8 billion in assets. Keycorp's  stock was trading recently at a little over $8 per share. Its 52 week range is from $9.77 to $5.59, and it has a price to earnings ratio of 8.8.  It has a market capitalization of $7.8 billion, and pays a quarterly dividend of 3 cents per share, for an annual yield of 1.4%.

Keycorp just posted another typically dull quarter, in which it posted earnings of $201 million, or $0.21 per share. This was one penny per share above the mean analyst estimate, but sharply lower than the $0.33 per share from the 4^th quarter of 2010. For all of 2011, net from continuing operations was $857 million, over double the 2010 profit of $413 million. The bank's secondary numbers include a return on assets in 2011 of 1.01%, and an efficiency ratio of 0.72 for the fourth quarter of 2011, and 0.67 for all of 2011.

Keycorp is a shell of the thriving bank it was five years ago. Since 2007, assets have fallen by $12 billion, and loans outstanding have fallen from about $75 billion to the current $49.6 billion. One thing that has not fallen is shares outstanding, which have nearly tripled in the past five years, diluting current shareholders in the process.

I see Keycorp as a bloated organization without any sense of momentum going forward. It needs its core, lower Great Lakes area economy to improve, but even that is no guarantee. It has siphoned off much of its loan loss reserves to shore up earnings, so economic growth and loan growth will have to come with higher reserve growth than many of its peers. I would avoid investing in Keycorp.

Regions Financial Corp. (NYSE: RF)

Regions is a large regional bank based in Birmingham, Alabama. It is the nation's 15^th largest bank, with over 1,700 retail branches across the south and lower Mississippi valley, and about $127 billion in assets. Regions' stock was trading recently at about $5 per share. Its 52 week range is from $8.09 to $2.82, and it has a market capitalization of nearly $6.4 billion. It has no price to earnings ratio as it lost money in 2011, but does pay a token dividend of 1 cent per quarter for a yield of 0.8%.

Regions is a bank that has not recovered from the 2008 – 09 recession. In 2008 to 2010, the bank posted net losses of $5.6 billion, $1.03 billion, and $539 million, respectively. Regions had been on track to report an actual profit in 2011, but it instead chose to recognize a $731 million goodwill charge to clear the way for its pending sale of its Morgan Keegan Brokerage unit to Raymond James Financial, Inc. (RJF).  As a result, Regions posted a loss for the 4^th quarter of $602 million, or $0.48 per share.

For all of 2011, the loss was $429 million, or $0.34 per share. Were it not for the goodwill impairment charge, Regions would have reported profits of $118 million, or $0.09 per share in the 4^th quarter, and $540 million, or $0.43 for the full 2011. Even that though, only represents a 0.37% return on assets

Regions is the largest bank left that has not repaid its loans to the government under the Troubled Assets Relief Program. Preferred stock dividends are a continued drain on Region's capital. Regions has not restrained its loans the way many other banks have, and outstanding loans are nearly 60% of assets. Loan commitment trends are up, and Regions' cost of funds should improve going forward as over $13 billion in high interest rate deposits come due prior to the end of 2012. Still there are no signs Regions is close to restoring is historic profitability levels, and for now this stock is only for pure speculators.

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