The beauty of the banking business is that it's largely about numbers. To oversimplify, it's all about borrowing at one rate and lending that money back out at a higher rate. Clean, simple, profitable.
If we unsimplify it just a bit, we can look at risk management as well -- if you're making a small amount from the interest spread but losing tons because you're making loans that don't get paid back in full, it's a recipe for disaster. And that's where the beauty of banking has become the bungle of banking over the past few years.
But for investors who are currently avoiding the banking sector like the plague, it's important to remember that banking is a highly cyclical business. Even the most dependable banks face tougher times when the economy is in the dumps and consumers and businesses are strapped for cash.
What that also means, though, is that just like with other cyclical businesses, the time to buy is not when everything is rosy and the banks are rolling in cash, but when there are storm clouds and other investors are skittish about taking a chance on the sector.
However, for those investors who are interested in the sector, I think it may be worthwhile to go beyond the big names -- Bank of America, JPMorgan Chase, Citigroup, etc. -- that always show up in the news, and instead take a look at smaller, simpler banks. Here are five that I think are particularly attractive.
Profitable through the crisis years? Check. Early repayment of TARP funds? Check. Meaningful dividend? Check. Dedicated leadership from a CEO with multiple decades at the company? Check there, too.
There are a lot of reasons to like BB&T as an investment. Like many other regional banks, BB&T's nonperforming loans jumped during the crisis, but they've shown a marked decrease over the past 12 months. The bank also has a strong balance sheet and has reserved well against the potential for souring loans. There's not a whole lot that's flashy about BB&T, but that's a good thing -- especially when the numbers look like they do.
And like most of the others below, on a price-to-book value basis, BB&T's stock trades at about half what it did prior to the crisis.
Maybe it's something about having an ampersand in the bank's name, but M&T is another larger regional bank that I think is worth owning. In a recent presentation, the bank outlined a few very compelling reasons that the stock is worth a look:
- It's the top stock performer among the 100 largest banks since 1983.
- It has a 19.2% annual return since 1980 -- and it compares that to Berkshire Hathaway's 20.4% return.
- It's outperformed the S&P 500 by 20%, 31%, and 69% over the last three, five, and 10 years, respectively.
Surprised that M&T would be so bold as to compare itself to Warren Buffett's Berkshire? Don't be -- Berkshire is one of the largest M&T shareholders, with a $420 million stake. Another top 10 holder? The bank's chairman and CEO, Robert Wilmers, who owns $304 million in M&T stock. That's something I definitely like to see.
Huntington can't make the same claim that it stayed profitable throughout the banking meltdown. In fact, the bank reported a hefty $3 billion loss in 2009. On the flip side, though, it's also the cheapest stock on my list today and the only one currently trading below its book value. This may not be the very best bank on the list, but management at Huntington has done a good job rapidly getting the bank's balance sheet back in order, and I think today's price is pretty darn attractive.
If you want the highest-quality bank on the list, Commerce may be the way to go. The tradeoff is that the upside for Commerce may not be as great as that of the others, but this is a bank that's not likely to cause you many sleepless nights. As with BB&T and M&T, Commerce stayed profitable throughout the crisis. Better still, its nonperforming loans/total loans ratio peaked at 1.2%, versus 2.6% for M&T and 5.9% for Huntington.
And like M&T, at Commerce you can find a very dedicated leader who really believes in the business. CEO David Kemper has been in the top spot for more than 20 years and he owns a $50 million slug of the bank's stock.
Valley National Bancorp
For those whose primary concern is how much their bank stock will pay them, Valley may be the way to go. With a current dividend yield of 5.6%, Valley is easily the highest-yielder of the group. And with that dividend you get many of the same features that draw me to the other banks above -- well-managed through the downturn, a strong balance sheet, and long-serving leadership (CEO Gerald Lipkin has been with the bank since 1975!). If you love dividends and want to dip into banks, Valley is worth a look.
Don't take my word for it
Because I think all of these stocks are going to outperform the market in the years ahead, I'll be adding them all to my Motley Fool CAPS account with a big thumbs-up.
But I'm not the only investor who's interested in the banking sector. In fact, some of the best investors around have been taking an interest in the group. To find out who these mystery investors are and what banks they like, check out The Motley Fool's special report: "The Stocks Only the Smartest Investors Are Buying." You can grab a free copy by clicking here.