Don't Ignore These Regional Banks

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

Regional banks are often ignored for the massive players in the industry, but there are several that could present investors with a heap of profits. These are three regional banks (which are classified as having less than $50 billion in assets) to keep your eye on.

SunTrust is diversifying the smart way

SunTrust Banks' (NYSE: STI) move on Aug. 5 to commit $5 billion for commercial mortgage loans is a move that will allow the company to gain a major revenue stream that is less fee-based. The income generated from the new asset-management unit is less capital intensive than much of the other coverage that it issues, and this will likely garner a higher profit margin. The move also helps diversify the company, which stabilizes it in case of an unstable economy. 

I like the investment, as it also allows SunTrust to work with new clients without having to pay for a distribution channel. This is an innovative way to potentially expand business without the staggering expenses often associated with that type of expansion. I expect the move will improve the company's profit margin and raise revenue.

Analysts don't expect the investmetn to pay off until next year. This year's EPS is expected to decline 24% before rising 8.5% next year. Revenue is expected to decline 19.7% this year before rising 0.9% next year. The pessimism could also be due to the company's recent track record of weak returns.

First Horizon moves home

First Horizon National's (NYSE: FHN) move to return its focus to Tennessee, after expanding out of the state in 2007 and 2008, means the company will be able to build its foundation again. The company was out of its element when it expanded to California, Florida and Arizona just before, and during, the recession. Clearly, that was bad timing, and the company is cutting its out-of-state losses and coming home. Expect, more restructuring to continue, and the profit margin to rise.

Down the road, the company will likely resume its national expansion, but it needs to lick its wounds before strapping on its travel boots again. I think the company has recovered from its move, and will now be able to regroup in its home state. The firm has a 13% market share in Tennessee, so interstate expansion is also a definite possibility.

Analysts also like this company's prospects and expect the firm to start earning again this year after an $0.11 per share loss last year. This year the company is forecasted to net a whopping $0.74 per share, before rising another 20% next year.

Banco Bradesco is a symbol of Brazil's potential

Banco Bradesco SA (NYSE: BBD) is your way to invest in Brazil, which is expected to be one of the top four fastest-developing nations on Earth in the next several years. The bank is the third largest in the nation and is one of the strongest. That strength will let the bank take advantage of the many growth opportunities in the nation, particularly in the mortgage lending side.

However, like every investment, there are risks. The only gaping issue I see at Bradesco is the expansion strategy to offer service to the low- and medium-income segment. That will carry with it higher loan losses. 

That could be why analysts anticipate an 8% drop in EPS this year, before a rise of 12% next year. Investors should be wary about investing in Brazil, as the level of uncertainty is high. But the nation could be your ticket to massive returns.

Loan loss decreases are key to these banks' success

With the S&P 500 Bank ETF index (regional bank tracker) rising 30% so far this year, the sector is certainly shifting. However, while regional banks do stand to profit from the strong jobs growth in the U.S., they often suffer for longer than the larger banks according to analyst Richard Bove. However, that could be the reason why many of these banks are just beginning to make significant improvements to their loan losses, and that is likely just the beginning.


Phillip Woolgar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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