Over the past few days the idea of bank stock valuation has come up in several conversations. Other than indication that we have some fairly boring conversation I found this interesting on several levels.
It seems everyone wants to reinvent the wheel when it comes to stocks and valuations. Yesterday our own Brain Sozzi asked if old school measures like book value still mattered. On Twitter the other night an analyst suggested that earnings were the major determinant of bank stock prices. Given that accounting practices allow me to take a junk bank on the verge of liquidation and make it look profitable that's a ridiculous assumption. Give me a bank at a discount to book value, solid metrics and some time and I will make money. More importantly, I will avoid grievous losses. As I reminded Sozzi, those of us using old-school metrics have the advantage of having survived long enough to be old.
This is not to say I am close minded. I am willing to play with new ideas and metrics to see if they offer any value. I ran some screens this morning to attempt to look at banks in a new way that might offer the potential for long-term profits. I started with banks priced at a discount to book value (that's not up for debate) and then instead of my usual metrics substituted the Piotroski F score. My thought was that this should provide me banks priced cheaply where the fundamentals are showing strong improvements. My screen only selected those banks with a score of seven or more.
The list turns some old favorites and some new ideas that might be worth considering. To my surprise, the largest bank on the list is Bank of America (BAC). As I mentioned yesterday, I am not a fan of BofA as by adding Countrywide and Merrill Lynch to their already culpable core operations they became the poster child for bad behavior and bailouts. But if the stock ever slips back to the 50% of tangible book value I use as a threshold for troubled bank I may have to consider buying it.
At the other end of the spectrum, my microcap local pick from last month, Annapolis National (ANNB), also makes the list. I consider this bank the poster child for the trade of the decade and would be a buyer on weakness in spite of the recent price increase of the shares.
One of my favorite regional banks makes the list as well. KeyCorp (KEY) has seen its balance sheet and loan losses improve steadily since the depths of the banking crisis in 2009. Non-performing assets are now below the key 2% level and the common equity ratio is above 10. The price to tangible book value is just 80%, so the stock remains a solid buy in my opinion. The bank is doing a great job of managing its way out of the crisis and tangible book value has increased by 15% over the past three years. The bank remains over-reserved with loan loss reserves standing at 142% of nonperforming loans at the end of the first quarter. After passing the recent stress tests with flying colors the company authorized a stock buyback plan and is considering a dividend increase. Insiders have a lot of faith in the future as they have been consistently buying the shares for the past two years.
Banner Bank (BANR) is another stock trading below book value that is showing rapid improvement in its loan portfolio. Losses and problem loans have both fallen more than 50% on a year-over-year basis for the Washington State-based bank. The stock price has improved substantially but so have the fundamentals of the bank. At 70% of tangible book value the stock is still cheap.
I am still old school in my approach but the Piotroski F score is an interesting new-school addition to the bank stock evaluation process.