Regional Banking Back to the Fore

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

At a time when major banking corporations are stifled by the expectations of stricter capital rules, regional banking stocks such as Popular (NASDAQ: BPOP), Huntington Bancshares (NASDAQ: HBAN), and PNC Financial Services (NYSE: PNC) continue to make headway.

To be on the right side of the fence, regional banks actually never lost their appeal, but they now stand an even greater chance of attracting bigger investors as many would be forced to re-balance their portfolio in favor of smaller corporations once the new bank capital rules are decided next week. Here is what make these stocks potential winners.

Popular: The center of attention

As the name suggests, Popular has been very popular with investors in the last year with the stock nearly doubling over the period. With a debt equity ratio of 0.45, it is not highly leveraged yet to take advantage of low interest rates. More recently, there have been some concerns about the bank’s profitability as it reported a loss of $120 million in the quarter ended March 31, 2013. In comparison, profits stood at $48.4 million during the same period last year.

However, this is due to the fact that Popular has been busy shedding its non-performing assets, often at a loss. The company is slated to report second-quarter results later this month and the story may once again be the same with earnings clouded by restructuring efforts. However, the good thing is that the market is noticing and appreciating the short-term pain which will yield long-term gains. The stock trades at a forward price to earnings ratio of 9.9 and offers 17% discount to its book value.

Bigger is not always better

With 691 branches, mostly concentrated in Ohio and Michigan, Huntington Bancshares is a much larger a bank than Popular and has seen impressive stock price growth in recent months. Since the markets of these companies are different, their dynamics are also different.

With 34% gains so far this year, Huntington Bancshares trades at a forward price to earnings ratio of 12.2 and offers a dividend yield of 2.3%. Its bigger size means the growth in profits is almost flat to marginally negative as seen in recent quarters.

In the latest quarter, its net interest income grew 3.1% to $394.6 million, but net income dropped to $151.8 million from $153.3 million in the same period a year ago. Even though its gearing ratio stands at 0.25, a price to book value ratio of 1.3 indicates there may be limited room to grow further.

PNC growth

PNC has seen its stock advancing more than 30% so far in 2013. This money center bank practically has nationwide operations with 2,800 retail banking branches as on Dec. 31, 2012. Despite its larger size, PNC has been reporting strong quarterly financial results, which explain the steady growth in stock price.

During the quarter ended March 31, 2013, the company reported a 25.8% jump in profits to $1 billion. As a result, the company boosted its quarterly dividend payout by 10%.This now works out to a respectable dividend yield of 2.3%

Strong earnings expectations mean the stock trades at a forward earnings ratio of 11. Shares quoting close to book value per share is another proof that more value is yet to be unlocked here. Meanwhile, the prospects of increasing interest rates are likely to further strengthen margins which already stand at an enviable 19%.

At a recent London conference, PNC indicated that its balance sheet is positioned to benefit from an increase in interest rates. PNC believes that it has the deposit funding base and balance sheet flexibility to adjust to changing interest rates and market conditions. In other words, PNC is a good place to hide in case rates continue to rise. 

Foolish bottom line

All other factors remaining the same, Popular and PNC are better calls than Huntington Bancshares. While the latter has certain advantages in terms of margins and leveraging its size, Huntington Bancshares seems to have run a bit ahead of its fundamentals.

Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

 


Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool owns shares of Huntington Bancshares and PNC Financial Services. 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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