Are Regional Banks Getting Too Pricey?

Regional banks have seen their profiles rise considerably over the past few years, as investors turn to their stocks as a more stable alternative to the big banks. These smaller institutions are sure to enjoy increasing attention as dark clouds continue to hover over the big boys -- such as the plethora of lawsuits being filed against those banks in regards to crisis-era securities shenanigans.

Are these regionals getting too big for their britches?
Is all this attention turning these stocks into dandies that are becoming too expensive for the average investor to buy? Let's take a look at some ratios and statistics for a handful of the more popular banks.

Bank

Price-to-Earnings

Price-to-Book

1-Year EPS Growth (Estimated)

1-Year Stock-Price Gain

KeyCorp (NYSE: KEY  ) 9.60 0.80 0.98% 29%
BB&T (NYSE: BBT  ) 12.96 1.18 9.3% 52%
M&T Bank (NYSE: MTB  ) 15.47 1.24 8.57% 19%
Regions Financial (NYSE: RF  ) 19.59 0.70 9.99% 73%
Synovus Financial (NYSE: SNV  ) 22.22 0.82 55.83% 55%

The first three banks look reasonably priced in the earnings-multiples department, while Regions and Synovus appear to be trading a little high for what they deliver. But that mostly has to do with currently depressed earnings and the expectation of earnings improvement. For Synouvus, this is on the heels of growth that is expected to top 164% by the end of this year, which represents Synovus' creeping into positive EPS territory during 2011.

Similarly, Regions' rather sedate predicted growth rate follows a 331% increase expected by the end of this year. The bank has given investors good reason to believe, having broadened its net interest income margin appreciably, slashed its provision for loan losses, and greatly bumped up its net income since one year ago June. Additionally, the bank repaid government bailout funds in full this past April and has embarked on an aggressive program to elbow its way into the lucrative credit card market.

In addition, these two banks are trading at a discount, as is KeyCorp -- which some analysts have hailed as being a nice bargain, particularly since, like many regionals, it has no exposure to troubled foreign markets. KeyCorp is also on an expansion program, having recently acquired 37 new branch locations from HSBC Bank in upstate New York.

BB&T seems to have expansion hopes in south Florida and is rumored to be interested in purchasing BankUnited to expand its presence there. Meanwhile, M&T has endured some criticism for holding back on TARP-funds repayment, but it may be able to get out from under that burden very soon: The U.S. Treasury is selling preferred stock of 32 smaller bailout recipients in the hopes of retiring the program, and one of those banks is M&T. Shareholders will probably be happy to see that chapter closed, which may soon be reflected in M&T's stock price.

Fool's take
So, are regional banks overpriced? From the information I gathered, I don't think they are. After all, three of these bank stocks are trading below book value right now and have engaged in business moves that could lead investors to expect an improved outlook.

That doesn't mean they're an automatic bargain, though. While Synovus, Regions, and KeyCorp might look like a deal since they're trading at a discount to book value, there are some issues to think about. For instance, KeyCorp's projected growth is quite small, despite recent acquisitions.

As for Synovus and Regions, neither is an earnings powerhouse, though Regions seems to be moving closer in that direction and has many irons in the fire. Synovus' recovering earnings will need to be watched to see if it pans out. The bank has improved its credit quality with its cost-cutting program and by reducing its credit losses, but it still has a way to go before it reports robust earnings.

Both BB&T and M&T are trading at approximately 1.2 times book value but have some good reasons to be considered a smart investment. BB&T is a strong, consistent performer -- which, as fellow Fool John Maxfield notes, is nothing to complain about. M&T, as has very recently been mentioned, has just announced its acquisition of Hudson City Bancorp, which it says will be immediately accretive to value. For a long-term investment, these two banks look the strongest, and definitely worth a second look.

If you're partial to investing in banking stocks, our banking analysts have some great advice for you. Our special report, "The Stocks Only the Smartest Investors Are Buying," will clue you in to some of the sweetest financial companies around, including one that even Warren Buffett would love. Want more? It's free.

Fool contributor Amanda Alix owns no shares in the companies mentioned above. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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