An Alternative to the Big Banks

There are tons of bargains to be had in the financial sector, with companies that are making money hand over fist in the current economic environment trading at discounts to book value. When you add in the lower prices due to the political bickering in Washington that has caused markets to fall over the past several weeks, you get an excellent opportunity to scoop up profitable banks at historically low valuations. 

One excellent example is Regions Financial  (NYSE: RF  ) , a large regional bank that has managed to avoid some of the major legal and regulatory turmoil of its big brothers like Citigroup (NYSE: C  ) and JPMorgan Chase

A bit about Regions
Regions operates mainly in the Southeast, with almost 1,700 branches and just under $96 billion in deposits. The company provides a full range of services to its clients, including banking, brokerage, investment, mortgage, insurance, and commercial accounts. 

A lower-risk option than some of the bigger banks
Some of the bigger banks still have tremendous legal issues hanging over their heads from the financial crisis. Many of these, especially in JPMorgan's case, are not the result of wrongdoing by the bank itself, but by the companies that were scooped up for pennies on the dollar in 2008 and 2009. JPMorgan is facing a gigantic settlement, rumored to be around $11 billion, because of the mortgage practices of Bear Stearns and Washington Mutual. 

Citigroup was one of the banks most heavily supported by the government, and as a result of the government's stake in the company (a stake that has since been sold), existing shareholders were massively diluted. In fact, adjusting for splits, Citigroup shares are worth just 8.6% of what they were trading for before the crisis, and that's after the gains of the past few years. 

This kind of makes the impact of the crisis on Regions' shares seem relatively mild by comparison (Regions is worth about 25% of its pre-crisis value). Citigroup has also paid several large settlements related to its "bad behavior" during the crisis, such as a $590 million settlement for hiding the extent of its toxic assets.

Regions, on the other hand, has seen very little fallout from the financial crisis lingering on.  During the crisis, Regions received a $3.5 billion loan from TARP, which it paid back in early 2012. The dilution for Regions shareholders was relatively small, and it paid back the government with the money from the $1.2 billion sale of Morgan Keegan and a $900 million stock offering, which is relatively small considering Regions' $13.2 billion market cap.

Regions since the financial crisis
Another thing to like about Regions is how well its business has stabilized since the crisis. Consider this chart of the bank's interest income since 2007, and you'll see that it has been within a tight range over the past several years, even with rates falling tremendously over that time period.

Source: TD Ameritrade.

Regions has also done a very good job of cleaning up its books since the crisis. The amount of nonperforming loans on the books continue to decrease and now make up just 2.01% of Regions' total loan portfolio, down from 2.51% a year earlier, or a 27% decline in the value of its nonperforming loans. The company also significantly lowered its allowances for loan losses this year by about half a billion dollars, a very good sign of confidence in the company's current financial state.

Historical versus current valuation of Regions
Regions has a book value of $10.45 as of the most recent quarter, meaning that shares currently trade for just 0.91 times book value, a rare discount based on Regions' history. The company has a tangible book value (the value of all of their actual assets) of $6.78 per share, meaning the company trades for 1.4 times tangible book -- an incredible bargain. 

When comparing the current number to its tangible book value over the last decade, particularly before the financial crisis, the discount offered right now becomes very clear. Now, Regions may not get back to the 3 times TBV multiple anytime soon, but for this profitable bank to be valued at just over what its physical assets are worth may be a huge opportunity. 

Source: S&P Capital IQ. 

Going forward
While there are plenty of financials "on sale" right now, Regions is a great option because it is valued similarly to the big banks, but brings less baggage with it.

Is Regions the bank to buy?
Have you missed out on the massive gains in bank stocks over the past few years? There's good news: It's not too late. Bargains of a lifetime are still available, but you need to know where to look. The Motley Fool's new report "Finding the Next Bank Stock Home Run" will show you how and where to find these deals. It's completely free -- click here to get started.


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