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Regional Wreckage: A Look Back At Banks In 2008
Investors in banking stocks are probably anxious to ring in the New Year, as 2008 saw their shares beaten up and thrown out of favor by Wall Street. Financial stocks have suffered through a year of unprecedented strife. Two major investment banks disappeared, another was acquired and the remaining two became traditional bank holding companies. U.S. taxpayers are now on the hook for more than $700 billion to bailout mortgage lenders, investment banks and some of the largest money center banks in the U.S.
Regional banks have proved to be no safe haven for wary investors in financials. The decline in the iShares Dow Jones U.S. Regional Banks ETF (NYSE:IAT) has mirrored that of the S&P 500 at roughly 40% in the past year. The SPDR KBW Regional Banking ETF (NYSE:KRE), which is primarily made up of names less exposed to bad loans and exotic financial instruments, is also down about 25% in the last year.
With the dawn of a new year upon us, and hopefully the credit crisis starting to move behind us, it might be time for investors to evaluate some of the larger regional banks. Let's take a look at five that may be worth watching in 2009.
Size Matters in Banking
It may be hard to consider Wells Fargo a regional bank anymore, especially after the California-based company gained $800 billion in deposits and a strong foothold along the East Coast by acquiring rival Wachovia. Still, the company's national presence lags that of larger rivals Bank of America (NYSE:BAC) and Citigroup (NYSE:C).
As far as regional banks go, Wells Fargo is the biggest and most well capitalized. The company known for its stagecoach logo is a favorite among legendary value investor Warren Buffett and sports a stellar Tier 1 capital ratio and balance sheet. In addition, Wells Fargo shares far outperformed the three aforementioned rivals in 2008 and have a dividend of $1.36. (Find out how economic capital and regulatory capital affects risk management in How Do Banks Determine Risk?)
US Bancorp is another regional banking stalwart that kept its nose clean, comparatively speaking, in 2008. This is another Buffett favorite, and Buffett's Berkshire Hathaway is US Bancorp's largest shareholder. The bank operates mainly in the Midwest, but recently acquired two California banks on the cheap. Investors should monitor US Bancorp's integration of these two acquisitions as the company will be taking on $11.3 billion in liabilities to go along with $12.8 billion in assets.
US Bancorp is also taking part in the federal government's Trouble Assets Relief Program, essentially selling a stake to the U.S. government to unload tainted assets from its balance sheets. Still, US Bancorp has a strong tradition of dividend payments, and a current yield over 6% could make it an intriguing value play.
Waiting to Walk Down the Aisle
Atlanta-based SunTrust is always mentioned in takeover chatter when it comes to regional banks, yet no suitor has come along and it's difficult to imagine who it would be at this point. Wachovia served many of the same markets as SunTrust and has since been acquired by Wells Fargo. Before the acquisition Wells Fargo was frequently mentioned as a possible groom for SunTrust. However, Wall Street still seems to believe the way to play SunTrust is as an acquisition target.
SunTrust has taken painstaking efforts to shore up its cash position throughout 2008. In June and July, the company sold its 43.6 million share stake in its Atlanta neighbor Coca-Cola (NYSE:KO). Then it pared its dividend by 30%. Most recently, SunTrust said it would seek $3.5 billion in government assistance to bolster its balance sheet.
Regional Rebound?
BB&T of North Carolina and Michigan-based Comerica are the quintessential large cap regional banks. They operate branches primarily in the Southeast and Midwest, two regions that have been hammered especially hard by the sluggish U.S. economy.
BB&T, with its $1.88 dividend, will receive $3.1 billion in federal assistance, but this may not be cause for alarm with investors. The shares currently trade at barely over 1-times book value and have a P/E of just over 10.
Comerica could be a bit dicier for investors at this point. Midwest economies have suffered at the hands of a loss of factory jobs and deteriorating auto industry. The company recently slashed its dividend by 50% and has $10.6 billion in loan exposure to the troubled auto industry. While Comerica shares may look inexpensive with a price-to-book value of less than 1 and a P/E around 11, it's tough to endorse a long-term play in a stock with exposure to bad economies and a failing industry. (For related reading, try Texas Ratio Rounds Up Bank Failures.)
What Will 2009 Hold for Regional Banks?
Without the benefit of a crystal ball or time machine, it's impossible to know what 2009 has in store for regional banks. One thing is certain, and that is quality names always find a way to rise to the top and that should lead investors to Wells Fargo and US Bancorp.
For a complete guide to evaluating a bank, check out Analyzing A Bank's Financial Statements.
Regional banks have proved to be no safe haven for wary investors in financials. The decline in the iShares Dow Jones U.S. Regional Banks ETF (NYSE:IAT) has mirrored that of the S&P 500 at roughly 40% in the past year. The SPDR KBW Regional Banking ETF (NYSE:KRE), which is primarily made up of names less exposed to bad loans and exotic financial instruments, is also down about 25% in the last year.
With the dawn of a new year upon us, and hopefully the credit crisis starting to move behind us, it might be time for investors to evaluate some of the larger regional banks. Let's take a look at five that may be worth watching in 2009.
| Regional Banks To Watch in 2009 | ||
| Company | EPS (mrq) | EPS Estimate |
| BB&T (NYSE:BBT) |
$0.64 | $0.65 |
| Comerica (NYSE:CMA) |
$0.18 | $0.06 |
| SunTrust (NYSE:STI) |
$0.88 | $0.60 |
| US Bancorp (NYSE:USB) |
$0.32 | $0.47 |
| Wells Fargo (NYSE:WFC) |
$0.49 | $0.41 |
Size Matters in Banking
It may be hard to consider Wells Fargo a regional bank anymore, especially after the California-based company gained $800 billion in deposits and a strong foothold along the East Coast by acquiring rival Wachovia. Still, the company's national presence lags that of larger rivals Bank of America (NYSE:BAC) and Citigroup (NYSE:C).
As far as regional banks go, Wells Fargo is the biggest and most well capitalized. The company known for its stagecoach logo is a favorite among legendary value investor Warren Buffett and sports a stellar Tier 1 capital ratio and balance sheet. In addition, Wells Fargo shares far outperformed the three aforementioned rivals in 2008 and have a dividend of $1.36. (Find out how economic capital and regulatory capital affects risk management in How Do Banks Determine Risk?)
US Bancorp is another regional banking stalwart that kept its nose clean, comparatively speaking, in 2008. This is another Buffett favorite, and Buffett's Berkshire Hathaway is US Bancorp's largest shareholder. The bank operates mainly in the Midwest, but recently acquired two California banks on the cheap. Investors should monitor US Bancorp's integration of these two acquisitions as the company will be taking on $11.3 billion in liabilities to go along with $12.8 billion in assets.
US Bancorp is also taking part in the federal government's Trouble Assets Relief Program, essentially selling a stake to the U.S. government to unload tainted assets from its balance sheets. Still, US Bancorp has a strong tradition of dividend payments, and a current yield over 6% could make it an intriguing value play.
Atlanta-based SunTrust is always mentioned in takeover chatter when it comes to regional banks, yet no suitor has come along and it's difficult to imagine who it would be at this point. Wachovia served many of the same markets as SunTrust and has since been acquired by Wells Fargo. Before the acquisition Wells Fargo was frequently mentioned as a possible groom for SunTrust. However, Wall Street still seems to believe the way to play SunTrust is as an acquisition target.
SunTrust has taken painstaking efforts to shore up its cash position throughout 2008. In June and July, the company sold its 43.6 million share stake in its Atlanta neighbor Coca-Cola (NYSE:KO). Then it pared its dividend by 30%. Most recently, SunTrust said it would seek $3.5 billion in government assistance to bolster its balance sheet.
Regional Rebound?
BB&T of North Carolina and Michigan-based Comerica are the quintessential large cap regional banks. They operate branches primarily in the Southeast and Midwest, two regions that have been hammered especially hard by the sluggish U.S. economy.
BB&T, with its $1.88 dividend, will receive $3.1 billion in federal assistance, but this may not be cause for alarm with investors. The shares currently trade at barely over 1-times book value and have a P/E of just over 10.
Comerica could be a bit dicier for investors at this point. Midwest economies have suffered at the hands of a loss of factory jobs and deteriorating auto industry. The company recently slashed its dividend by 50% and has $10.6 billion in loan exposure to the troubled auto industry. While Comerica shares may look inexpensive with a price-to-book value of less than 1 and a P/E around 11, it's tough to endorse a long-term play in a stock with exposure to bad economies and a failing industry. (For related reading, try Texas Ratio Rounds Up Bank Failures.)
What Will 2009 Hold for Regional Banks?
Without the benefit of a crystal ball or time machine, it's impossible to know what 2009 has in store for regional banks. One thing is certain, and that is quality names always find a way to rise to the top and that should lead investors to Wells Fargo and US Bancorp.
For a complete guide to evaluating a bank, check out Analyzing A Bank's Financial Statements.
by
Todd Shriber
Todd Shriber was a financial journalist for five years with Bloomberg News and MergerMarket.com, covering a variety of sectors, including energy, financials and technology. He is also a Series 7 license holder and has actively traded equities, forex and options.
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