Regional Banks are Gaining Appeal

Brittney Barrett |

Banking giants JPMorgan (JPM), Goldman Sachs (GS) and Wells Fargo (WFC) have rebounded considerably since the global financial crisis, but given the distrust born of that incident, and continued struggles faced by housing and employment, big banks still face significant stigma. Shares of major financials tumbled today in the aftermath of a disappointing employment report. Unemployment, closely linked to mortgage and credit card delinquencies as well as weak consumer lending, challenges the stability of banking institutions and rattles investor confidence in the recovery. These issues, until they’re resolved, may continue to discourage investors from investing in huge financial institutions.

For some investors, that may mean putting their money in regional banks, which have continued to gain stability since the crisis. These banks, because of their domestic concentration are characterized by stronger community relationships. This in turn, can instill a sense of stability and help to reduce risk. In general, regional banks posses superior capitalization with their Tier 1 risk based capital and tangible equity ratios higher than those of larger competitors. Furthermore, in a period of market declines, the Return of Equity (ROE) and Return of Assets (ROA) for these local banks falls more slowly than National banks. Regionals also have less charge-offs and provisions for loan losses to average total loans than larger competitors. For these reasons, and several weak spots in larger financials, regional banks, are becoming increasingly attractive investment option.

 

Essentially the mega banks listed above, Wells-Fargo (WFC), Citibank (C), Bank of America (BAC), JP Morgan Chase (JPM), Regions Financial (RF) and the rest of the gamut may not have the competitive edge their size once conveyed.  The banks lack high market pricing power and do not diversify their risk for heightened safety.

Additionally, several of the banks, including the flailing Bank of America (BAC) are considering increased or new fees as well as canceling debit card reward programs, potentially risking the loss of millions of customers.  Bank of America Corporation (BAC), for its part, increased the monthly fee on its most popular checking account from $8.95 to $12 and added a provision that essentially intends to bring back overdraft fees. Perhaps the most egregious of the new changes though, is the bank’s intention to replace its existing basic checking accounts with new ones to accommodate an obligatory monthly fee. JPMorgan Chase & Co. (JPM) has enacted similar measures, raising fees for overdraft and wire transfers. Fees have also been added to sopped payment and new customer checking account fees have been doubled to $12.

These shifts are discouraging customers, who may, when faced with these fees, seek out regional banks or credit unions that don’t charge fees. Perhaps as a consequence of this, regional banks continue to exhibit if not strength, at least a growing stability, indicated by the declining provisions for loan losses or (PLLs), which serve as an indicator that bank officials feel the worst is behind them.

The observance of positive trends in regional banks, coupled with the fee hikes at major financial institutions does appear to be causing a shift. The Michigan Credit Union League is an excellent example. 322 credit unions added upwards of 2,600 new customers in Q1 2011.

Michigan is not alone in poaching customers from the big wigs; Both PNC Financial Services Group (PNC) and Huntingston Bancshares Inc. (HBAN) are offering free checking accounts to attract small customers.

Some regional bank stocks that have exhibited resiliency through the crisis and appear to moving forward include, Hudson City Bancorp ( HCBK) and KeyCorp (KEY). Hudson City was among the few banks that did not require government assistance in 2008. Since then, it has struggled somewhat but shows signs of improved performance; tripling its noninterest income and decreasing borrowing while raising deposits and its tier 1 leverage ratio. Earlier losses for the company were attributed to restructuring. The new infrastructure is intended to reduce interest rates on borrowing.

KeyCorp (KEY) has been laboring to improve its credit portfolio and appears to have succeeded. The company has been leaving behind more risky lending arenas. A decision that may have helped the bank exceed analysts' expectation with its first quarter profit of $173 million. For Q1, KeyCorp also reported a reduction in nonperforming assets, loans and charge-offs. New branches are also being added to help improve long-term growth.

These forward steps are indicative of a positive trend among regional banks, but like their goliath counterparts are still susceptible to the market currents. The end result may be less dramatic, but regional banks will continue to be challenged dawdling return on the housing front and the growth in domestic loans observed so far this year. The combination of a potential interest rate hike by the Fed and more borrowing may result in higher default and thinner profits long-term.

 

 

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

Companies

Symbol Name Price Change % Volume
FRC.P.A First Republicbank Corp DEP SHS REPSTG 1/40TH PERP 25.39 0.00 0.00 0

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