The most frequently asked question of me the past few days has been, "What does Brexit mean for the trade of the decade?" In the grand scheme of things, the answer is, "Not very much."
Most of U.S. banks barely do any business outside their immediate markets, much less in the U.K. or Europe. While a drastic slowing of the U.S. economy as a result of political turmoil might shake things up a bit on the credit side, I don't really see that happening.
In the short run there are two things to consider:
1. Strong selling in regional banks has brought some larger banks back on the radar screen for the first time in years.
2. Brexit means interest rates will likely stay low even longer and that could lead many bank executives to accelerate their decision to go ahead and sell their banks.
I have talked with several bankers who were waiting for higher net interest margins to help solve their expense problems and now that's further into the future than they had hoped.
Among larger regionals, shares of Comerica (CMA) are dropping to attractive levels. The Dallas-based bank does have some issues with energy exposure, totaling about $5.6 billion, but is confident I has reserved adequately.
Several of Comerica's largest shareholders have been pushing the bank to consider a sale and CEO Ralph Babb has indicated he is willing to listen to offers. FBR Capital Markets analyst Bob Ramsey recently explained the unrest to the Dallas Business Journal saying "Everyone wants to maximize their investments. Comerica's investors are tired of waiting for higher rates to really make this model work."
With Brexit likely delaying higher rates and putting pressure on oil prices Comerica may need to accelerate its decision and sell. The bank is currently trading at 85% of book value and given its strong franchise and branch network in Texas, California, Michigan, Arizona and Florida I believe a sale would fetch at least 120% of book value.
Regions Financial (RF) has seen its share price hammered recently, falling by more than 13% in the past week and 18% in the past month. The bank does have some energy exposure, but Regions doesn't see a problem unless oil stays below $24 for an extended period of time. Meanwhile, the bank has plenty of capital with an equity-to-asset ratio of more than 13 and currently nonperforming assets just 1.06% of total assets.
Management has been conservative in their approach to potential problem loans as reserves are about 100% of nonperforming loan. Based on the results of 2016 stress tests, Regions appears strong enough to survive under the most adverse scenario, so the current price of 80% of tangible book strikes me as too low.
Also hard hit has been Citizens Financial Group (CFG), with the stock dropping more than 20% over the past month and 13% in the past week. Providence, R.I.-based Citizens is now trading at 76% of tangible book value, which strikes me as ridiculous. The bank has very low energy exposure and its loan growth has come from residential mortgages, auto lending and student loans.
Citizens has an equity-to-assets ratio of 13.8 and nonperforming assets are just 0.82% of total assets, so the bank is in solid financial shape. The dividend was increased 20% earlier this year and the stock now yields 2.6%. Management has been buying back stock at bargain prices, with the total share count dropping 3.3% in 2015 and 2.5% in 2014. I expect more buybacks in the second half of 2016.
CFG is now too cheap not to buy, in my opinion.
U.S. banks are not going to be decimated by Brexit concerns and the selling is overdone. Lower rates for a longer period does mean that net interest margins will continue to be a headwind for the banks but this is not a fatal condition for the regionals. Loan quality remains strong and most regionals have plenty of capital right now.
While my major focus remains the smaller banks that will need to merge, these larger regionals are also looking attractive again.