2 Super-Regional Banks to Watch

Motley Fool analyst Matt Koppenheffer sits down with Rick Engdahl for a side-of-desk interview about banks. Are they really that hard to understand? Can the big banks be trusted? Join us for a discussion that sheds some light on banks from Citigroup to Wells Fargo, as well as some of the smaller players.

In this video segment, Matt explains the strengths of super-regionals U.S. Bancorp (NYSE: USB  ) and PNC Financial Services  (NYSE: PNC  ) , and takes a look at why banks are just as subject to the "location, location, location" rule as real estate.

A full transcript follows the video.

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Rick Engdahl: Do you have any favorites among the super-regional banks that you looked at? BB&Ts or PNCs -- I don't know if PNC fits in there.

Matt Koppenheffer: PNC does.

Rick: Any of the others that you mentioned there. Are there any stories there, or are they just boring banks doing their business that you just look at the financials of the business?

Matt: I don't know. There's always some sort of story.

I like U.S. Bancorp. That's unfortunately a little bit -- or a lot -- more expensive than a lot of the other banks, particularly the bigger banks, but when you compare...

When you think of Wells Fargo as one of the highest-quality banks, U.S. Bancorp I would lump right in there with Wells Fargo, in terms of running a good traditional -- or a great traditional -- banking business.

What's also interesting about U.S. Bancorp is its fee-based business side is very, very strong. When you break apart the individual businesses, on that fee side, they're very different from bank to bank. U.S. Bancorp, for instance, has a very strong transaction processing business which, on a stand-alone basis, would be a great business to own, but you get that in this whole U.S. Bancorp package.

I think that's a great bank. I think it's a high price that investors have to pay for it right now, so I think if you're thinking safe bank, reasonable returns going forward, that might be an opportunity.

I think with PNC, that is a well-run bank that has done really well growing, and has a good strategy for ... building out its expansion, I should say. Building out its expansion. I don't see it doing a whole lot of additional expanding right now because it purchased property in the Midwest.

It got a big business in the Midwest. It bought a bunch of branches in the U.S. Southeast, and that kind of expanded its footprint from the north and mid-Atlantic, out west a little bit more and then down south a little bit more.

Now what they're trying to do is they need to integrate those branches into the PNC business, bring up the profitability there, and just make sure it's a cohesive overall unit. I think they're showing strong results already, doing that, and I think given the history of PNC, given the quality of the bank and the bankers there, I think they will do a good job. I think the investors will be rewarded for that.

I think really, within the regional banks and the super-regional banks, it's really about the same thing. It's taking an x-ray to the bank, figuring out exactly what it does, and whether it does it well.

From that perspective though -- from thinking about really focused regional banks -- just like real estate is location, location, location, banking is very much location, location, location as well.

If you think about a small bank that's focused on, not even Florida, but maybe a certain part of southern Florida, it's almost a no-brainer that it was going to get killed in the financial crisis because that was where some of the worst hit.

You've got Florida, you've got Arizona, Nevada, Southern California; any bank that was focused on those particular regions, or any one of those particular regions, was going to get slaughtered.

Now when you think about the recovery that we've had -- and in particular the housing market recovery -- existing home sales, new home sales, home prices, have all been roaring back; particularly this year, and even more so in those hardest-hit areas.

Just as that will help homeowners there, it'll help businesses there because that helps the economy, it helps banks there. You're going to see a stronger bounce-back from the small regional bank in a very hard-hit area than you will, maybe, from a bigger bank that had a bigger geographic focus that hit some of the hard-hit areas, but some areas that weren't particularly hit hard.

When we think about what regional banks or super-regional banks held up better than others, a big part of that was the geographic focus. Regents Financial is an example of a regional bank -- it kind of borders regional/super-regional, it doesn't matter -- but they're focused mainly on the U.S. Southeast.

It's kind of like, if you're there and that's where you're making most of your loans, you're in bad luck when that area of the country melts down in the financial crisis.


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Related Tickers

7/30/2014 4:00 PM
PNC $84.11 Up +0.65 +0.78%
PNC Financial Serv… CAPS Rating: ***
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US Bancorp CAPS Rating: ****

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