4 Regional Banks With Upside
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This article is aimed at screening out undervalued regional banks in the US on which analysts are bullish. These banking stocks would be liquid with little institutional ownership. For this purpose, I examined their daily trading volume, discount to book value, percentage of institutional ownership and consensus recommendation of the analysts covering the stock. The specific criteria are as follows:
- The selected bank must possess an average trading volume of 1 million shares a day.
- The selected bank must possess institutional ownership of less than 5%.
- For each of the banking companies under consideration, analysts must have a consensus outperform recommendation.
Fifth Third Bancorp (NASDAQ: FITB), FirstMerit Corporation (NASDAQ: FMER), US Bancorp (NYSE: USB) and Regions Financial (NYSE: RF) seem to have satisfied the above criteria. The remainder of the investment thesis will touch upon each of the short-listed stocks briefly.
US Bancorp reported net income of $1.42 billion for the fourth quarter on strong new lending activity of $71.5 billion. The bank also reported 6.4% growth in average total loans over the prior year, while deposits grew 9.2% over the same time period. Net interest income for the quarter improved 4.1%, while charge-offs were $70 million lower from the linked quarter and non-performing assets decreased 4.6% sequentially. At the end of the third quarter, USB maintained a tier 1 capital ratio of 10.8%.
Looking at the bank’s key metrics, I found that the average daily trading volume for US Bancorp’s shares is 7.43 million, while the stock possessed a book value per share of $18.31 at the end of the fourth quarter of 2012. Based on Friday's close of $33.91/share, shares of US Bancorp are trading at an 85% premium to book value. Analysts covering the stock have a consensus outperform recommendation for US Bancorp, with 18% of them recommending their investors buy the stock, while another 20.5% rate the stock outperform. A majority (59%) of the analysts rate the stock a hold. The consensus mean target price for the stock is $36.92, representing an upside of 9%.
Fifth Third Bancorp
Fifth Third reported a 28% year over year surge in its fourth quarter net income of $390 million. The improvement in the bottom line was a result of gain on the sale of Vantiv shares and expense for debt extinguishment associated with the termination of FHLB debt. The bank reported a $9 million decline in net charge-offs and 12% decline in non-performing assets compared to the linked quarter. Fifth Third maintained a tier 1 common ratio of 9.51%.
Fifth Third Bancorp has a daily average trading volume of 10.9 million, while at the end of the most recent quarter it reported a book value of $15.10 per share. Since the bank is exchanging hands at $16.05/share, shares of Fifth Third Bancorp are trading at 6.3% premium. Analysts covering the stock have a consensus outperform recommendation for Fifth Third Bancorp, with 23% of them recommending their investors buy the stock, while another 23% rate the stock outperform. A majority i.e., 52% of the analysts rate the stock hold. The consensus mean target price for the stock is $17.38, representing an upside of 8.3%.
The fourth quarter reported bottom line of $38.2 million for FirstMerit, increased 9% from the linked quarter. During the quarter, the company continued its organic growth as average commercial non-covered loan growth remained at 2.88%, while average core deposits grew 1.08% over the linked quarter. The bank also experienced superior credit quality as its non-performing assets as percent of non-covered loans declined to 0.57% from 0.77% in the linked quarter, while the net charge-offs to non-covered average loans decreased 0.34% from 0.72% over the same time period. The quarter end tangible equity to assets was 8.16%.
With an average daily volume of 1.13 million, FirstMerit has a book value of $15 per share at the end of the fourth quarter of 2012. Currently the stock is trading at 3% premium to its book value. Analysts covering the stock have a consensus outperform recommendation for FirstMerit, with 25% of them recommending their investors buy the stock, while another 19% rate the stock outperform. A majority, i.e., 50% of the analysts rate the stock hold. The consensus mean target price for the stock is $16.58, representing an upside of 7.5%.
Driven by continued growth in middle market commercial and industrial and indirect auto lending, Regions Financial reported a bottom line of $261 million at the end of the fourth quarter. The improvement in results was partially offset by declines in other loan portfolios. During the quarter, the bank’s asset quality improved as its non-performing assets declined $296 million, or 13% over the linked quarter, while net charge-offs decreased 31% over the same time period. The bank reported a tier 1 capital ratio of 12% at the end of the most recent quarter.
Analysts covering the stock have a consensus outperform recommendation for Regions Financial, with 14% of them recommending their investors buy the stock, while another 31% rate the stock outperform. A majority, i.e., 48% of the analysts rate the stock hold. The consensus mean target price for the stock is $8.25, representing an upside of 5.1%. The of Regions Financial has an average daily volume of 17.2 million, while according to its fourth quarter book value of $10.63, its share are trading at 26% discount.
The aforementioned banks have continued to show strength in their results, which is why a majority of analysts rate them outperform. These banks, besides providing an upside potential, possess strong balance sheets, coupled with improving capital positions. Therefore, I recommend investors invest in them.
equityfinancials has no position in any stocks mentioned. The Motley Fool owns shares of Fifth Third Bancorp and FirstMerit. 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!