This Bank Is a Better Buy Than Any of the “Big Four”

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Regions Financial (NYSE: RF) has been steadily outperforming its major peers, up 65% year to date, whereas BB&T, Huntington, Fifth Third and PNC are all up less than 20%. When comparing Regions to larger banks like JPMorgan and Wells Fargo, the latter two have returned less than half that of RF shares. Billionaire Jim Simons is one of Regions' biggest fans after he increased his stake by almost 250% last quarter (check out Jim Simons' biggest bets).

With robust initiatives to de-risk its portfolio through asset liquidation and a reduction in real estate, Regions has managed to lower its debt-to-capital ratio to an industry-low 35%. Regions has also seen positive votes of confidence from all of the major rating agencies. S&P upped its outlook to stable in August 2011, Fitch Ratings moved Regions to stable in November of that same year, and Moody’s gave the bank this designation in February 2012.

On the revenue side, net top line is expected to be down 17% by the end of this year as brokerage and investment banking sales decline, but this negative growth is expected to slow in 2013 to -3.5%. Regions also collected $1.2 billion on the sale of its brokerage unit, Morgan Keegan, to Raymond James Financial. This boost in cash position could help improve Regions’ dividend yield of 0.6%.

Regions trades well below major peer Fifth Third at a P/B of 0.7x, which is also below the other major banks. We believe that Regions is in part shunned due to its 16x trailing P/E; this is unattractive compared to Fifth Third (10x) and Wells Fargo (11x). Looking at its forward P/E of only 9x, though, we see solid value where investors might be overlooking Regions' growth potential.

Is it a better investment, though, than its competitors?

Fifth Third Bancorp (NASDAQ: FITB) is one of Regions’ top peers, but it trades at a higher valuation with less than stellar growth. The sell-side expects Fifth Third to grow its EPS by 5% a year over the next half-decade, and shares trade at an unflattering 1.86 earnings growth multiple, or PEG.

Wells Fargo (NYSE: WFC) also pays a higher dividend yield at 2.6% - compared to Regions – but trades at 10x forward earnings. This "big four" bank also trades at the highest P/B (1.3x) of the five banks listed here. Regions has an advantage on a debt-to-capital ratio basis, where Wells Fargo trades at 54%. Warren Buffett continues to be Wells Fargo's biggest supporter, with nearly 20% of his 13F portfolio invested in the bank (check out Warren Buffett's newest picks).

Bank of America (NYSE: BAC) pays a particularly low dividend yield of 0.4%. After a massive run-up – over 100% year to date - in the bank’s share price, Bank of America now trades at a moderately expensive 12x forward earnings. This bank trades at a 70% debt-to-capital ratio, well above that of Regions. Despite being on the low-end of the value range at a P/B of 0.6x, it also has a return on equity (1.8%) well below Regions. Notable hedge fund manager John Paulson owns over 27 million Bank of America shares (see John Paulson's top picks).

Last but certainly not least, JPMorgan Chase (NYSE: JPM) pays the highest dividend yield of the bunch listed here at 2.7%. Next to Regions, JPMorgan is the cheaper bank at 8x forward earnings and 0.9x book value, but it also has a higher than average debt-to-capital ratio of 74%.

If it wasn't clear by now, we see Regions as one of the best values in the banking industry given its low-end valuation and solid debt position.

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Bank of America, Fifth Third Bancorp, JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. 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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