As we’ve discussed before, investing in regional banks represent about the purest play on the economy itself. Unlike their opaque, wildly leveraged cousins in investment banking, regional banks tend to rely on good old-fashioned banking fundamentals. That is, when times are good, they can loan out more money and rake in more cash, and when times are bad, people default on loans and they can’t lend out as much.
Pretty simple really. It reasons then that if an investor is bearish on economic prospects, they should avoid betting on a bank. However, if they are bullish on the economy, investing in a regional bank can be a rather straightforward way to capitalize on that optimism.
Picking out a regional bank play can be daunting. We decided, for the time being, to limit our search to a specific geographic region. In this case, we looked only at banks in the an oft-overlooked region for investment, the Midwest.
But of course, even if one is bullish on the American (and more specifically, Midwestern) economy, one can’t just go picking stocks to throw money at willy-nilly. There has to be some criteria, after all, preferably of the fundamental variety.
To find the fundamentally strongest banks in the Midwest, we looked for regional banks that have:
1) A P/C and P/B greater than 1
It is important for finance companies to have strong book value and cash, but validation of these assets by the market is also a key factor. So, while price ratios are generally stronger when lower, a P/C (price to cash ratio) or P/B (price to book ratio) of 1 should be a minimum “floor” for investing. This does not mean, though, that high P/C or P/B ratios are a good sign, simply that a minimum level of market acknowledgement is a necessity.
2) An operating margin greater than 25%
Operating margin shows how efficiently a company is operating is business after a good is sold. Gross profit-operating costs. The operating margin is more appropriate for banks because the costs associated with operating are much more significant for a bank than the cogs.
3) An ROI greater than 25%
Return on Investment, or ROI, shows how well a company is using its invested capital. Since banks are essentially made up of all invested capital, this is a very important statistic.
Out of all of the Midwestern banks trading on the market, we found a total of ten that possess all three of these attributes and thus can be considered to be the fundamentally strongest regional bank stocks in America. They are:
First Business Financial Services (FBIZ)
Performance YTD: +26.17 percent
Community Bank Shares of Indiana (CBIN)
Performance YTD: +18.86 percent
Mutualfirst Financial Inc. ($MSFS)
Performance YTD: +11.36 percent
Independent Bank Corporation (IBCP)
Performance YTD: +7.67 percent
Ohio Valley Banc Corp (OVBC)
Performance YTD: +1.70 percent
First Financial Bancorp (FFBC)
Performance YTD: -1.04 percent
Mercantile Bank Corp (MBWM)
Performance YTD: -2.98 percent
German American Bancorp (GABC)
Performance YTD: -3.01 percent
Firstbank Corporation (FBMI)
Performance YTD: -3.79 percent
Taylor Capital Group (TAYC)
Performance YTD: -14.07 percent
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer