A Regional Bank that Trumps Big Players
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When it comes to the financial markets, investors are always looking for those stocks that are going to lead the economic recovery forward, and it is no secret that the financial sector is a leading sector. Naturally, looking at the big banks like Bank of America (NYSE: BAC) or some of the others would be the thing to do. Even though the bank has grown quite a bit since the beginning of the year, we do not believe now is the right time to get in. On the other hand, smaller regional banks may be a better buy.
The trouble with big banks
For one thing, Bank of America is still dealing with the housing market, selling foreclosed homes in groups of hundreds. They will continue to deal with it this year even as the housing market looks for a bottom, a sharp change from the bearish tone they held for so long.
There are some telling signs that a bottom can be seen. Maybe not fully predicted, but seen. And when we speak of a bottom, it never happens congruently, but on a local level in differing areas. Take Phoenix, Arizona for example. This was an area hard hit by deflation of housing prices. This year, 90% of the zip codes in the Phoenix area are seeing price increases. Other metro areas are to follow, but it is not something that is seen on a national level until pockets start to increase like they are now.
This will help Bank of America, but it has a long way to go before a complete turnaround is in shape. The recent Bank of America rally was fueled by a burn off of the fears of last year more than anything else. The bank was never expected to present strong earnings because it has focused on fixing problems instead of growth. This quarter, analysts expect the stock to still underperform by 29% from a year ago. As the year progresses it is expected to do better. Next quarter’s EPS growth should exceed 118% and for the year, 338%. Those numbers appear large, but not in the wake of the poor performance in 2011.
But still, since the bottom last year investors have realized an almost 100% gain on their shares. Investors will be looking to book those gains and walk away from the table. As we have heard that the European and Chinese slowdowns are manifesting themselves—this may lead to slower growth in the United States. There is a good chance the recent loan loss reserve release is reversed in coming quarters.
The better buy
But still, we find that there is better investment opportunity in the regional banks right now. A Bank like US Bancorp (NYSE: USB) has had good quarterly sales and a large increase in net income last quarter. If we take a look at it fundamentally, it also appears very attractive as an investment.
They are starting out the year strong. Just reporting earnings, the company posted 67 cents per share, slightly ahead of analyst expectations. Net income came in at $1.29 billion. All indications point to a strong and growing bank.
In the first three months of the year, it has lent $56 billion. These loans came from commercial, mortgage, and credit card accounts. This is huge for the banking industry. Regional banks like UBS make money through lending and the increase this first quater is significant. From the end of 2008, loans were hard to come by as banks were very conservative. A decline in loans also occurred nationwide as lending fell to $7.38 trillion at the end of 2010, a 0.2 percent decline from 2009, according to the Federal Deposit Insurance Corp. That represented the 10th consecutive quarter of loan declines. But with the economy slowly growing, USB is growing as well.
The company has also increased its deposits the first quarter by 11.7%. A greater amount of deposits means more money to loan and a greater opportunity for income. We have seen revenue growth of 9.1% because of this over the first quarter of 2011.
The Motley Fool owns shares of Bank of America. johnmylant has no positions in the stocks mentioned above. 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.