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Is This the Best Bank in the Southwest?

By Robert Eberhard – Updated Apr 6, 2017 at 6:40PM

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Finding value by putting some regional banks under the magnifying glass.

Financial stocks have been taking a beating recently, but banks that operate in certain regions usually stood out in my earlier examination of smaller banks. Let's use this information to determine which bank might be the best in the Southwest.

What's the Southwest Region?
The Southwest Region, as it's sometimes idiosyncratically defined in banking, is really a three-state area, dominated by Texas, which could almost be its own region. Half of the banks on my list are based in Texas, with the other four split equally between Oklahoma and Missouri. Some of them may have small footprints in other nearby states, but most will be based in one of these states.

Screening factors
I will rank and average the banks based on four factors: P/E ratio, P/B ratio, dividend yield, and net income margin. Only banks with a market cap over $300 million will be included.

My first screening will eliminate all banks without earnings over the past 12 months, looking for the cheapest bank according to this metric. My second factor is P/B ratio. In the banking industry, a value of 1.5 is reasonable, and the adage I like is "buy at a half, sell at two." Only banks that pay a dividend will be included -- the higher the better. Finally, I will be using net income margin as another method of comparing the banks' profitability. My initial screen turned up the following eight names:

Company

P/E Ratio (TTM)

P/B Ratio

Dividend Yield

Net Income Margin

International Bancshares (Nasdaq: IBOC) 8.6 0.64 2.6% 24.5%
Prosperity Bancshares (Nasdaq: PRSP) 11.8 1.05 2.1% 35.4%
BancFirst Corp. (Nasdaq: BANF) 12.5 1.13 3.1% 19.5%
Cullen/Frost Bankers (NYSE: CFR) 13.3 1.32 3.9% 25.3%
First Financial Bankshares (Nasdaq: FFIN) 13.8 1.82 3.5% 32.3%
Commerce Bancshares (Nasdaq: CBSH) 12.7 1.46 2.6% 23.5%
BOK Financial (Nasdaq: BOKF) 12.8 1.23 2.3% 21.6%
UMB Financial Corp. (Nasdaq: UMBF) 13.7 1.21 2.3% 13.8%
Regional Averages 15.2 0.93 2.1% 16.2%

Source: FinViz.com, TTM = trailing 12 months.

International Bancshares started out in 1966 to serve small businesses in Laredo, Texas, and has since expanded to more than 275 branches in Texas and Oklahoma. It was also ranked as the No. 1 Hispanic-led financial institution in the country. International Bancshares is proud that it has "never experienced a down year" -- presumably meaning an annual loss -- and continues to inspire confidence among customers. The future won't necessarily be just like the past, but the bank's success in previous years bodes well for investors looking at the company. Our resident banking expert, Anand Chokkavelu, recently added BancFirst and International Bancshares to his real-money Rising Star Portfolio.

Regional opportunities abound!
Other Fools point to great values in some of the larger banks, and I couldn't agree more. However, there are many great opportunities in some of the regional banks. I will be paying special attention to International Bancshares and adding it to My Watchlist. Feel free to do the same.

Fool contributor Robert Eberhard owns no shares in the companies mentioned here. Follow him on Twitter, where he goes by @GuruEbby. The Motley Fool owns shares of International Bancshares and BancFirst. Motley Fool newsletter services have recommended buying shares of International Bancshares. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Cullen/Frost Bankers, Inc. Stock Quote
Cullen/Frost Bankers, Inc.
CFR
$132.22 (-1.12%) $-1.50
UMB Financial Corporation Stock Quote
UMB Financial Corporation
UMBF
$84.29 (-1.04%) $0.89
International Bancshares Corporation Stock Quote
International Bancshares Corporation
IBOC
$42.50 (-1.57%) $0.68
Commerce Bancshares, Inc. Stock Quote
Commerce Bancshares, Inc.
CBSH
$66.16 (-0.77%) $0.51
Prosperity Bancshares, Inc. Stock Quote
Prosperity Bancshares, Inc.
PB
$66.68 (-0.21%) $0.14
BOK Financial Corporation Stock Quote
BOK Financial Corporation
BOKF
$88.86 (0.70%) $0.62
BancFirst Corporation Stock Quote
BancFirst Corporation
BANF
$89.47 (-0.83%) $0.75
First Financial Bankshares, Inc. Stock Quote
First Financial Bankshares, Inc.
FFIN
$41.83 (-0.97%) $0.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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