So you've decided to venture into the world of banking. Choices abound -- do you take a chance with the mega banks like Bank of America (NYSE: BAC ) or stick to the smaller regional banks? Do you look for the cheapest bank stocks the market has to offer or head for quality?
There's a lot of legwork to be done in fully evaluating a bank -- particularly if you're not already familiar with the banking industry. However, if you're considering cheap regional banks that could offer significant gains, Regions Financial (NYSE: RF ) should probably be on your radar.
Here are three reasons why Regions could be a good buy right now:
Valuation has been the blaring neon sign for Regions screaming "Buy me!" Even after a significant gain for the stock over the past six months, Regions' shares still trade at just 0.7 times book value and 1.1 times tangible book value.
For comparison's sake, BB&T trades at 1.9 times tangible book, M&T Bank (NYSE: MTB ) fetches a 2.1 multiple, and PNC Financial has a 1.3 times tangible-book multiple. And looking at Regions' own history, in 2006, the stock traded at an average tangible-book multiple of three and an average, book-value multiple of 1.5.
But while Regions' current valuation does look enticing, it's not enough by itself in that category, because there are plenty of other banks that you can buy even cheaper. Among regionals, KeyCorp (NYSE: KEY ) has a 0.8 price-to-tangible-book multiple, while SunTrust has a multiple of 0.9. The big banks are even cheaper with Bank of America and Citigroup (NYSE: C ) changing hands at respective multiples of 0.6 and 0.5. JPMorgan Chase, meanwhile, can be had for the same tangible-book valuation as Regions.
But the take-home message is that Regions valuation multiples look cheap.
2. Corporate actions
Among the significant overhangs on Regions' stock over the past year have been the sale process for its Morgan Keegan brokerage arm and the fact that it had been under the thumb of the government's TARP program. Both are now resolved.
Back at the beginning of the year, Regions reached a deal with Raymond James to sell Morgan Keegan for $930 million. Regions also collected a $250 million dividend from the brokerage prior to the closing of the deal. The deal may turn out to have been a bargain buy for Raymond James, but it was a boon for Regions as it boosted its capital position at a time when the Federal Reserve was preparing a round of stress tests.
The deal also helped pave the way for Regions' April exit from TARP. In April, the bank repaid $3.5 billion in TARP funds and followed up with May repurchase of the warrants given to the U.S. Treasury through TARP. Not only does this eliminate a dividend payment to the Treasury, but it is also a vote of confidence that Regions can stand on its own two feet and fund itself through the private markets.
And speaking of private-market funding, Regions proved it could do that too, when it raised $900 million in equity in March.
3. Improving financials
If you took only a high-level look at Regions' first-quarter results, you may not have known what to make of them. Of obvious note was the fact that the bank posted net income of $199 million versus a $69 million profit in the March quarter of 2011. However, the year-over-year profit gain was driven primarily by lower loan-loss provisions -- which are an estimate by management -- while net interest income dropped 3.3%.
The lower interest income stems from the bank's lower asset base and, in particular, loan book. If investors want growth, Regions will have to reverse this, but it shouldn't be too concerning right now as the major focus has been battening down the hatches on its balance sheet and focusing on quality loans.
Meanwhile, the credit quality statistics for Regions' balance sheet back up the lowered loan-loss provisions. Annualized charge-offs as a percentage of loans were 1.73% in the March 2012 quarter compared to 2.37% in the March quarter of 2011. And despite the lower provision, Regions non-performing loan coverage -- that is, allowance for loan losses over non-performing loans -- increased from 1.03 in March 2011 to 1.18 in March 2012.
In addition, the bank's capital position has improved. Using estimates for Basel III capital requirements -- which are expected to phase in next year -- Regions ended the first quarter with Tier 1 and Tier 1 common capital ratios of 12.5% and 8.9%, respectively. The minimum requirements are 8.5% and 7%.
What are you waiting for?
Regions has taken some big steps forward over the past six months and that's made the bank more attractive from an investment standpoint. The market hasn't totally ignored this and the stock has gone up significantly over the same stretch, easily outpacing the KBW Bank Index. However, there's still a solid case to be made that pessimism about banks in general and Regions in particular has continued to keep the shares underpriced. I gave Regions a thumbs up in my CAPS portfolio back in February, and I still like it enough today to maintain that outperform call.
But even if Regions isn't the bank for you, you may not want to overlook the other banks out there. As my fellow Fools argued in this recent free special report, only the smartest investors are buying bank stocks.