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  1. Home
  2. / Investing
  3. / Financial Services

Buy a Solid 'Citizen' and Strong 'Investor'

These two large (for me) Northeast banks are attractive.
By TIM MELVIN Apr 18, 2016 | 03:00 PM EDT
Stocks quotes in this article: ISBC, CFG, RBS

In the midst of a whole bunch of book reading, baseball watching and rib smoking this weekend I took some time out to talk to my circle of friends active in the markets. While the Doha meetings and the lack of any kind of production cuts was a topic of interest, none of us expected any real progress out of the session, so we weren't surprised at the outcome. Eventually, however, the conversation came back around to banks and I was asked which larger banks might be a buy during the current weakness in financial stocks?

"Large banks" is a relative term to me as a good part of my Saturday was spent looking at two names with market caps of $55 million and $56 million, respectively. As you know, I favor the small banks and only became a buyer of the larger regionals at extreme points like 2001-2003 and 2008-2009. Only then do many of them trade at a sufficient discount to book value to attract my attention.

Having said that, there are a few larger banks that I have my eye on and hope decline to a level where I can be comfortable buying for the long term.

I am a big fan of Investors Bancorp (ISBC) and its CEO Kevin Cummings. Now that the New Jersey-based bank has put the conversion prices in the rearview mirror it has plenty of excess capital, which I believe it will use smartly to grow. Cummings has said on several occasions that he is open to smart acquisitions in Investors' core market area. The bank is taking a common sense approach and only considering deals that provide a reasonable earn-back period with limited share dilution. We have recently seen some acquisitions with long earn-back periods and the stock price of the acquirer took a hit, so I am happy Investors intends to avoid that mistake.

Until Investors finds a deal, it is perfectly content to buy back stock. On the last earnings call, Cummings said: "We have been aggressive buying back stock right now. And I would fully expect that the number that we quoted for this quarter of 60.2 million shares, that we would exceed that in the first quarter. We're well on our way."

Investors has a great franchise in the New Jersey/New York marketplace and I believe long-term shareholders will be well rewarded. I own stock in the bank and if sector weakness drives the price back below book value I would add to my stake.

With total assets of $138 billion and a market capitalization of $11.9 billion, Citizens Financial (CFG) is the largest bank stock I have purchased in several years. Citizens was spun off from Royal Bank of Scotland (RBS) and I like its approach to managing and growing the bank.

Citizens has plenty of capital, with an equity-to-assets ratio of 13.87, and has been using it to reward shareholders. In 2015, the bank repurchased $500 million in common stock and paid $221 million in dividends. Credit quality is strong, reflected by nonperforming assets being just 0.67% of total assets. The bank does have about $1.6 billion in oil and gas exposure but even if the whole portfolio defaulted tomorrow nonperforming assets would still be below 2%.

The bank has over 1,200 branches in 11 states across New England, the Mid-Atlantic and Midwest regions. It has the capital to expand by acquisition but so far is concentrating on improving returns and organically growing the loan book and deposit base. The shares trade at 95% of book value so they are a bargain for long-term patient investors. Citizens is a high-quality regional bank, so if the sector decline pushes the price lower, it would be chance to acquire more at a discounted price.

While I generally prefer the smaller banks, these two are reasonably valued and in both cases I like what management is doing. And both have well-known value and bank stock-specific investors as major shareholders. If bank or general stock market weakness causes them to trade down, consider it a major buying opportunity.

Citizens is scheduled to report earnings on April 21 and Investors one week later. Given that few banks have had a great first quarter, this could be a chance to buy on an earnings-related decline, leading to superior long-term returns.

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At the time of publication, Melvin was long CFG and ISBC.

TAGS: Investing | U.S. Equity | Financial Services

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