Banks To Bank On For Next Year

By Todd Shriber | September 21, 2010 AAA

Financials were all the rage in 2009, rebounding from some of the lowest - if not the lowest - prices seen by many of the stocks in the sector to take the lead as high-beta market leaders. Obviously, those post-financial crisis price tags were the key. Seriously, who thought Bank of America (NYSE:BAC) was worth just $3 a share? Well, things have changed in 2010 as financials have found the going to be a bit tougher than what it was for the final nine months of 2009.

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The Financial Select Sector SPDR (NYSE:XLF) is barely positive year-to-date while Bank of America and JPMorgan Chase (NYSE:JPM), the two largest U.S. banks by assets, and Goldman Sachs (NYSE:GS), the top investment bank, are all in the red in 2010. That results in a big drag on the S&P 500 because financials account for 16% of the index's weight, more than any other sector.

With an eye toward the fourth quarter and 2011, we decided to take a a look at a quartet of financials that are worth tracking in the coming months. Two of the them may meet with your approval while the other two could prove to be stocks to avoid.

A Buyer Or A Seller?
Northern Trust (Nasdaq:NTRS) isn't a traditional money center bank, and that may be a good thing from an investors standpoint. The company competes with the likes Bank of New York Mellon (NYSE:BK) and State Street (NYSE:STT) in the custodian banking and asset managements sub-sectors of the financial world. That may play in Northern Trust's favor going forward, but the market seems to be saying a financial is a financial as the stock is down about 5% year-to-date.

Northern Trust, which has over $625 billion in assets under management and $3.7 trillion under custody, has made clear its intent to go shopping to add an asset manager or custody bank to its portfolio. For its part, Chicago-based Northern Trust has also been mentioned as a takeover target, but big acquisitions may take a while to return to banking sector until the economy improves in earnest. Acquiring Northern Trust would be a very big deal indeed.

Northern Trust is also one of the first foreign financial companies to make inroads in China, receiving a branch license to open an office there in August. Trading for 1.8 times book value and with a decent yield (by bank standards) of 2.3%, Northern Trust is one of the better financial stocks to watch over the medium-term.

Betting On BB&T
North Carolina-based BB&T (NYSE:BBT) used to be viewed as a regional bank, but given that is easily among the top 10 U.S. banks by assets, this is no sleepy community bank. In fact, BB&T's size and exposure to the southeastern real estate market made the stock fertile hunting ground for the bears at the apex of the financial crisis. Things got so bad that the company had to make a painful dividend cut. It should be noted that BB&T's dividend cut wasn't as bad as what we saw with some other banks, and the shares currently yield a respectable 2.6%.

The bank's current dividend is 60 cents a share, but if you're patient, you could see something in the order of 90 cents or even over $1 next year - at least that's the view of one analyst. Patience is going to be a virtue when it comes to BB&T as the company is the process of selling $1 billion in bad loans. That will be good news over the long-haul, but it will almost certainly lead to some bumps in the road in the near-term.

Remember this little tid-bit: BB&T was one of the few major U.S. banks that was profitable throughout the entire financial crisis.

Is The Sun Starting To Rise For SunTrust?
Atlanta-based SunTrust (NYSE:STI) is an enigma wrapped in a riddle, but at the end of the day, there are better options in the banking space for investors to explore. To its credit, SunTrust is expected to return to profitability in the third quarter. However, the bank still owes Uncle Sam billions in TARP funds. This is an embarrassing factoid when you consider most banks of this size have repaid their TARP loans.

Perhaps the most compelling reason to get involved with this stock is that analysts are chatting it up as a takeover target. Take it with a grain of salt because SunTrust has frequently been mentioned and yet it has never been acquired. Bottom line: It's never a good idea to buy a stock just because that company may be a takeover target.

Another Supposed Target
Give Ohio-based KeyCorp (NYSE:KEY) this much credit: the stock is up 50% year-to-date. However, that may have more to do with the single-digit price tag on the stock than great fundamentals. Oppenheimer recently upgraded the stock, but with a scant dividend yield of 0.5% and high unemployment in Key's primary operating areas, there are better choices in the sector. As is the case with SunTrust, Key has been mentioned as a takeover target and that could very well be the best near-term catalyst the stock sees.

Bottom Line: Stick With Quality
In any sector, it's always best to go with the best names and that axiom is especially true with financials. BB&T and Northern Trust are among the higher quality issues in the group, though as we noted, patience will be needed with BB&T. For the risk-taker, KeyCorp could be an interesting call option on takeover rumors and the downside is minimal given its low price tag. (For related reading, take a look at Analyzing A Bank's Financial Statements.)

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