5 Banks to Ring In the New Year

The beauty of the banking business is that it's largely about numbers. To oversimplify, it's all about borrowing at one rate and lending that money back out at a higher rate. Clean, simple, profitable.

If we unsimplify it just a bit, we can look at risk management as well -- if you're making a small amount from the interest spread but losing tons because you're making loans that don't get paid back in full, it's a recipe for disaster. And that's where the beauty of banking has become the bungle of banking over the past few years.

But for investors who are currently avoiding the banking sector like the plague, it's important to remember that banking is a highly cyclical business. Even the most dependable banks face tougher times when the economy is in the dumps and consumers and businesses are strapped for cash.

What that also means, though, is that just like with other cyclical businesses, the time to buy is not when everything is rosy and the banks are rolling in cash, but when there are storm clouds and other investors are skittish about taking a chance on the sector.

However, for those investors who are interested in the sector, I think it may be worthwhile to go beyond the big names -- Bank of America, JPMorgan Chase, Citigroup, etc. -- that always show up in the news, and instead take a look at smaller, simpler banks. Here are five that I think are particularly attractive.

BB&T (NYSE: BBT  )
Profitable through the crisis years? Check. Early repayment of TARP funds? Check. Meaningful dividend? Check. Dedicated leadership from a CEO with multiple decades at the company? Check there, too.

There are a lot of reasons to like BB&T as an investment. Like many other regional banks, BB&T's nonperforming loans jumped during the crisis, but they've shown a marked decrease over the past 12 months. The bank also has a strong balance sheet and has reserved well against the potential for souring loans. There's not a whole lot that's flashy about BB&T, but that's a good thing -- especially when the numbers look like they do.

And like most of the others below, on a price-to-book value basis, BB&T's stock trades at about half what it did prior to the crisis.

M&T Bank (NYSE: MTB  )
Maybe it's something about having an ampersand in the bank's name, but M&T is another larger regional bank that I think is worth owning. In a recent presentation, the bank outlined a few very compelling reasons that the stock is worth a look:

  • It's the top stock performer among the 100 largest banks since 1983.
  • It has a 19.2% annual return since 1980 -- and it compares that to Berkshire Hathaway's 20.4% return.
  • It's outperformed the S&P 500 by 20%, 31%, and 69% over the last three, five, and 10 years, respectively.

Surprised that M&T would be so bold as to compare itself to Warren Buffett's Berkshire? Don't be -- Berkshire is one of the largest M&T shareholders, with a $420 million stake. Another top 10 holder? The bank's chairman and CEO, Robert Wilmers, who owns $304 million in M&T stock. That's something I definitely like to see.

Huntington Bancshares (Nasdaq: HBAN  )
Huntington can't make the same claim that it stayed profitable throughout the banking meltdown. In fact, the bank reported a hefty $3 billion loss in 2009. On the flip side, though, it's also the cheapest stock on my list today and the only one currently trading below its book value. This may not be the very best bank on the list, but management at Huntington has done a good job rapidly getting the bank's balance sheet back in order, and I think today's price is pretty darn attractive.

Commerce Bancshares (Nasdaq: CBSH  )
If you want the highest-quality bank on the list, Commerce may be the way to go. The tradeoff is that the upside for Commerce may not be as great as that of the others, but this is a bank that's not likely to cause you many sleepless nights. As with BB&T and M&T, Commerce stayed profitable throughout the crisis. Better still, its nonperforming loans/total loans ratio peaked at 1.2%, versus 2.6% for M&T and 5.9% for Huntington.

And like M&T, at Commerce you can find a very dedicated leader who really believes in the business. CEO David Kemper has been in the top spot for more than 20 years and he owns a $50 million slug of the bank's stock.

Valley National Bancorp (NYSE: VLY  )
For those whose primary concern is how much their bank stock will pay them, Valley may be the way to go. With a current dividend yield of 5.6%, Valley is easily the highest-yielder of the group. And with that dividend you get many of the same features that draw me to the other banks above -- well-managed through the downturn, a strong balance sheet, and long-serving leadership (CEO Gerald Lipkin has been with the bank since 1975!). If you love dividends and want to dip into banks, Valley is worth a look.

Don't take my word for it
Because I think all of these stocks are going to outperform the market in the years ahead, I'll be adding them all to my Motley Fool CAPS account with a big thumbs-up.

But I'm not the only investor who's interested in the banking sector. In fact, some of the best investors around have been taking an interest in the group. To find out who these mystery investors are and what banks they like, check out The Motley Fool's special report: "The Stocks Only the Smartest Investors Are Buying." You can grab a free copy by clicking here.

The Motley Fool owns shares of JPMorgan Chase, Huntington Bancshares, Bank of America, Berkshire Hathaway, and Citigroup. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. 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.

Fool contributor Matt Koppenheffer owns shares of Bank of America and Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 05, 2012, at 3:22 PM, Teacherman1 wrote:

    Just a note on HBAN

    What happened in 2009 was under former management and was mostly attributable to a bad deal with Franklin.

    Ever since the new CEO came onboard, and promptly backed up his expectations for the future with a personal stock purchase of about $1M, the steps have been all positive.

    This is my number one choice in U.S. banks, as far as future outlooks go.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On January 05, 2012, at 5:30 PM, frankpeel wrote:

    Yes, these are all fine banks but as long

    as the present administration is in power

    it is foolish (not Foolish) to put money

    into bank stocks.

    The administration will bash banks with

    increasing vigor up to election day, Nov 6.

    If Romney wins on that day, a very big if,

    then that will be the moment to buy bank

    stocks.

    Frank

  • Report this Comment On January 05, 2012, at 7:18 PM, dennyinusa wrote:

    Frank

    The banking industry and Wall Street brought shame upon themselves. This administration has handled the banking and Wall Street industries with kid gloves compared to what many of them deserve. I am so tired of hearing bankers and Wall Street cry about how abused they are by the president and the public. If they had been looking out for the best interests of their customers, which most moral and ethical business’s do, we would not have the problems we have today. I am a carpenter, so by your reasoning it is perfectly acceptable for me to build someone a house and not put headers above openings for support, put bracing in to protect against high winds, use inferior materials, etc. If this person does not understand how a home needs built, it is perfectly acceptable for me to take total advantage of them since they naively believed since I am the professional that I would treat them fairly? If this is what you believe, I hope I never do business with any organization you are associated with. Since I do know there are people in my industry that do take advantage of people with less knowledge. I understand that we must have rules and regulations, which is what bankers and people on Wall Street need to accept

    Denny

  • Report this Comment On January 05, 2012, at 7:31 PM, TMFKopp wrote:

    @frankpeel and dennyinusa

    One thing to be careful of when talking about banks broadly is lumping them all into one bucket. The biggest banks that are so often in the press have -- in many ways -- very different businesses than the regional banks that I've highlighted above.

    When you see nonperforming loans rise sharply, it's a sign that dumb loans were made. However, when thinking about the biggest financial risk-takers and those that were really playing with fire prior to the financial crisis, the banks above don't enter the conversation in any meaningful way.

    Matt

  • Report this Comment On January 06, 2012, at 12:23 PM, nickjob wrote:

    Would rather have northern trust (ntrs).

  • Report this Comment On January 06, 2012, at 1:07 PM, TMFKopp wrote:

    @nickjob

    "Would rather have northern trust (ntrs)."

    That was actually among the banks I was considering for the list. A good pick as well as far as I know.

    Matt

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