As we approach the end of a tumultuous 2011, it's time to look back at the biggest winners and losers.
So in this series, that's exactly what we're doing, sector by sector. Today, let's take a look at the 10 biggest losers in regional banking. First, the backstory, then the results.
This year, we saw U.S. Treasuries get downgraded from AAA status while Congress played politics instead of fixing the budget; a domestic economy that has been recovering from its financial crisis in fits and starts; big trouble in Europe; and a Chinese economy that doesn't seem so bulletproof.
The daily volatility in the banking industry has been tremendous because the economic crisis over the last few years has been largely driven by the financial industry and because the banking industry as a whole holds a great deal of sovereign debt.
However, global issues affect the biggest banks more than most regional banks. Size in banking is usually directly proportional to the level of complexity and opacity in a bank's balance sheet. The extreme can be seen in the giant Wall Street banks like Goldman Sachs and Citigroup.
Also, the smaller the bank, the more localized that external factors tend to be. As an investor, you worry more about the local economy than the economy of Greece.
The 10 worst regional bank stocks of 2011
For context, the S&P 500 has returned 1.7% after dividends this year. In other words, the market has been basically flat, but these 10 regional banks have gotten slammed.
Price-to-Tangible Book Value
Hampton Roads Bankshares
Central Pacific Financial
Source: S&P Capital IQ. Return includes dividends, if any.
When we look at this list of the worst-performing banks, we should be looking for two things:
- Why the banks have fared so poorly.
- Whether there's opportunity.
Personally, I like to find small banks that have shown a good track record of operational performance. I want to see good, conservative lending, profits and good returns on investment, and preferably a dividend.
Not surprisingly given the poor returns this year, none of these banks are showing excellent metrics. Let's break it down. Of the 10, only three (Central Pacific, SunTrust, and Regions) are showing positive earnings for the last 12 months.
Looking past that, Central Pacific has a whopping 7.8% bad loan rate. SunTrust and Regions are better but not great on bad loans (2.8% and 3.8%). Meanwhile, they aren't impressive on their returns or dividends.
I don't want to leave you on a downer, though. Let me leave you with a regional bank that has some of the best operational numbers I've ever seen. I wrote about it in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy. Just click here to find out the name of the bank I believe Buffett would be interested in if he could still invest in small banks.