Strong capital ratios and improvement in its credit quality has helped First Horizon National (NYSE: FHN) retain its BBB+ rating on its long-term debt. The Tennessee-based bank also managed to beat analysts' estimates by reporting better-than-expected second-quarter earnings. Therefore, I decided to take a closer look at this regional bank and find out whether it deserves a place in my portfolio.
First Horizon almost did away with its provision for loan losses in its latest quarter, reducing it by a whopping 99% on a year-over-year basis. In fact, provisions have been falling for a while now. Twelve-month provisions fell to $97 million in June 2011 from $1.18 billion in June 2009. This reflects the bank's confidence in its asset quality. And that confidence isn't without cause.
The company's net charge-offs during the quarter declined by 50% compared with the second quarter of 2010. Nonperforming assets also fell by 17% for the same period.
First Horizon did, however, witness a drop in revenue. While net interest income dropped by 5%, its total revenue fell by 15%, mostly due to plunging non-interest revenue from areas like mortgage banking.
But as savvy investors, we need to look at earnings and beyond to decide whether a stock is worth investing in. Let's narrow things down by comparing the company with its closest peers along a few important parameters:
- Price/earnings (P/E) ratio: This ratio helps us look at a company's earnings relative to its price and determine how cheap or expensive the stock is.
- The price-to-book (P/B) ratio: Widely linked with value investing and a relevant metric for banks and other asset-heavy companies, P/B gives us a clear idea of a stock's value and indicates value opportunities.
- The tier 1 capital ratio: This metric, dividing the core equity capital by the bank's total risk-weighted assets, is a crucial ratio for measuring a bank's capital adequacy and its ability to stay afloat during bad times. It compares equity and reserves with total risk-weighted assets.
- The dividend yield: A stream of dividends can act like a cushion during market downturns. This metric shows how much a company is paying out relative to its price.
Take a look at the table below to get a better understanding of how First Horizon fares in terms of valuation when compared with its peers.
|
Company |
P/E |
Forward P/E |
P/B |
Tier 1 Capital Ratio |
|---|---|---|---|---|
| First Horizon | 12.5 | 10.3 | 0.72 | 14.4% |
| Zions Bancorporation (Nasdaq: ZION) | 88.5 | 11.8 | 0.66 | 15.9% |
| City National (NYSE: CYN) | 17.3 | 11.5 | 1.05 | 10.7% |
| First Citizens BancShares (Nasdaq: FCNCA) | 16.3 | NM | 0.87 | 15.4% |
Source: Capital IQ, a Standard & Poor's company. *Normalized, excluding unusual items.
Usually, banks with lower bad loan percentages have higher P/B ratios. But here, FHN has high capital levels and its assets are improving significantly. Its current P/E ratio is, in fact, the lowest in the group. To get a fuller picture, I considered forward P/E as well, which is also on the low end. If First Horizon is able to get a handle on its revenue problems, it could be an opportunity for Foolish investors.
The bottom line
As far as valuation and operations are concerned, First Horizon looks fairly promising. I would suggest Fools keep an eye on its operations. You can add it to your Watchlist by clicking here.
