You'd almost never know it, but there are banks to invest in beyond giants like JPMorgan and Bank of America.
To some extent, it's fair that the big banks get so much attention from the media. With total assets above $2 trillion, JPMorgan towers above all but the very few banks at the top with it. But for investors looking for the best returns, they may not be found in those big banks in the spotlight.
Last month, I took a look at three small banks that are worth close consideration. This time around, we're going to bump up the size spectrum and look at some larger regional banks. I've listed each bank below with a key attribute that makes it a compelling pick.
First Republic Bank
This bank has had a strange trip over the past five years. Acquired by Merrill Lynch not long before it ran into trouble and was snapped up by Bank of America, First Republic was then resold to a consortium that included private equity interests and current management.
The reason you'd want to own First Republic, however, is the bank's conservatism and safety. It didn't get carried away prior to the financial meltdown, so it didn't have much to atone for during the fallout. If you want to own a bank but are nervous about the quality of many banks' balance sheets, First Republic may be just what you're looking for.
For investors that think a bank needs to pay a dividend, the parent of Silicon Valley Bank will be a definite disappointment. But there's a trade-off to not paying a dividend: By hanging onto the profits that it earns, SVB has been able to grow its book value at an impressive clip. For the five years ending in 2011, SVB's tangible book value per share was up more than 100%. And that was five years during a massive financial crisis (as if you'd forgotten). So why consider SVB? In a word: growth.
New York Community Bancorp
If you felt let down by the lack of a dividend for SVB, then allow me to introduce you to NYB. New York Community Bancorp's stock currently pays a hefty 7.1% dividend yield. While that kind of a yield might make investors wonder if something is wrong, NYB is actually a very healthy bank. It just so happens that it's a bank that pays out the majority of its earnings as a big dividend. Investors shouldn't expect raging growth here -- in the dividend or the bank's size -- but for those looking for a quality bank with a big dividend, this could fit the bill.
East West Bancorp
A bank's "efficiency ratio" refers to its ability to turn revenue into profit. While specific formulas can vary, the efficiency ratio is the bank's non-interest expenses as a percentage of its revenue. As in golf, the lower the number, the better. Over the past 12 months, East West Bancorp's efficiency ratio has been 43%. To put that in context, much-admired megabank Wells Fargo has an efficiency ratio of 61%, US Bancorp's is 52%, and PNC Financial's is 64%. The less a bank spends on overhead, the more turns into profit for shareholders. That strikes me as a pretty good reason to consider East West.
I'll admit it, chasing after the cheapest stocks has gotten me into trouble in the past. That said, sometimes the cheap stock can be the stock that investors have given up on unfairly and left as a bargain for you to pick up. Is KeyCorp that stock in the banking sector? Regional banks in general aren't trading at the rock-bottom valuations that we can find among the larger and smaller banks, but with a current price-to-book value ratio of 0.8, KeyCorp is cheaper than most of its regional-bank peers.
As you might imagine, Key didn't navigate the financial crisis as well as other banks we've discussed here. It reported a $1.5 billion loss in 2008 and another $1.3 billion loss in 2009. However, the bank is back to solid profitability now, and it's worked down its nonperforming loans as a percentage of total loans from a peak of 3.8% in 2009 to 1.4%.
The bank on everyone's mind
I think all five of the banks above should be serious investment considerations. However, when it comes to banks, Bank of America is the one on the tip of everyone's tongue. If you want to get the skinny on whether you should be investing in this megabank, be sure to check out The Motley Fool's special report on B of A. Click here to find out more.
The Motley Fool owns shares of Bank of America, Key, JPMorgan Chase, PNC Financial Services, and Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.