Compared to the "big" banks (Citigroup Inc., Bank of America, JP Morgan, Wells Fargo and U.S. Bancorp), the regional banks (BB&T Corporation (NYSE: BBT), Huntington Bancshares Incorporated (NASDAQ: HBAN), Fifth Third Bancorp (NASDAQ: FITB), Regions Financial Corporation (NYSE: RF) and PNC Financial Services (NYSE: PNC)) trade cheaply as a group on a P/B and P/E basis. The "big" banks have an average P/B of 1.1x and P/E of 16x, but the regionals are at 0.9x (P/B) and 10x (P/E).
The two underperforming big banks, Citi and Bank of America, could also present some solid value to investors. Both of these banks are the cheapest on a book value basis among their peers. Including most of the regional banks and 'big' banks, Citi and Bank of America have failed to recover as much over the last half decade, with Citi down 85% and Bank of America down 70% over the last five years. Investors should be wary, however; both stocks carry much more debt than the regional banks do. Citi's debt-to-capital ratio comes in at 77% and Bank of America at 71%. As far as hedge fund interest goes, Bank of America is head-and-shoulders above Citi on being able to attract billionaires: John Paulson and Ken Griffin are just a couple.
All the regional-banks trade in a tight P/E range (between 9x and 11x) but the differences become more evident when digging deeper.
Two of the best picks in the industry include Regions and PNC. Both banks trade on the low-end on a price to book basis. Regions has seen some of the most pressure on its stock, but its plans to reorganize its bank model for higher revenues, and income is promising. Not only is Regions relatively cheap, it also has one of the lowest debt positions. While all the other regional banks listed above pay a dividend yield greater than 2.5%, Regions is at only 0.5%, leaving room for the potential to return capital to shareholders. PNC does have a higher debt load than Regions, but with its low-exposure to interest rates -- on a relative basis -- and strong acquisition history, PNC remains a top industry pick (see just why PNC is the best).
BB&T is the 11th largest U.S. bank by assets and loan growth, and is expected to come in rather solid at 5.5%, but the bank expects flat net interest income in 2013. Its 3Q results showed allowance for loan losses at 1.77% of loans and 133% of non-performing loans, above other top regional banks. With a stronghold in the Southeast U.S., BB&T is looking to diversify revenues beyond deposits, including upping its generation of fees from insurance and brokerage services, but many of these prospects might already be factored into the stock.
Huntington is still working on its turnaround, one that we see coming full circle, but still presenting interim pressures. A reorganization of its business model includes more of a focus on banking products, as opposed to geographical expansion. Holding Huntington back is its high loan losses, much like BB&T. Loan losses for 3Q were 2% of total loans and 177% of nonperforming loans. It appears that Huntington does have some intriguing exposure to some high growth loan markets: the majority of Huntington’s loans (over 40%) are to the commercial and industrial sector, which should be in high demand on the back of a rebounding economy.
Fifth Third is another bank, much like Huntington, that is focused more on the traditional banking model. Concentrated in the Mid-West U.S., its core focus on retail and commercial deposits has given it a niche as being a localized “hometown” bank with a wide footprint. As the bank moves forward, it hopes to further increase its footprint with acquisitions. The bank has some of the lowest exposure to the commercial real estate market, which would be a positive if a ‘bust’ of the commercial market were still expected. After the residential market began crumbling, the commercial real estate market was expected to follow, but the sector has yet to see the expected sharp decline.
Regions Financial’s near term pressures have been related to higher expenses, but expense management should drive longer-term growth. Last quarter was flush with various technology implementations to reduce operating costs, and management expects full year 2012 expenses to be lower than in 2011. Net interest margin for the most recent quarter was up to 3.11%, improving four basis points year over year. The bank is targeting higher non-interest revenues, which are already robust at 40% of revenues, and plans on reorganizing its wealth management segment to increase fee income and customer acquisition.
PNC is a super-regional, with a market value over $30 billion. Much like the uniqueness of the Fifth Third banking model, PNC is expected to perform really well over the interim given its relatively low exposure to interest rates. Over half of its business is generated from fee-based segments and since mid-2007 the bank has been profitable every quarter, other than 4Q 2008. The recent acquisition of RBC Bank gives PNC a footing in the Southeastern part of the U.S., where BB&T has managed to dominate the market. The acquisition is PNC’s seventh over the last eight years. The combination PNC's loan pipeline and RBC's assets should help with some of the best loan growth at 5% in 2013. PNC and Regions are also the two regional banks loved the most by hedge funds (according to 13F filings during 3Q). SAC Capital's Steve Cohen and Bridgewater Associates' Ray Dalio both increased their stakes in PNC during third quarter.