In the midst of all the debt talks the past few days, bank stocks have gotten clobbered. Bank of America (BAC) has been in free fall for the past month, declining by more than 30%. Citigroup (C) is off about the same percentage, making me look smarter than I actually am with my call to short the stock after the reverse split.
People often ask me what I think of the big banks' outlooks, and my answer is that I don't know and I don't care. I have no intention of every buying any of these names, with the possible exception of Wells Fargo (WFC) if that bank should ever trade below its tangible book value. The balance-sheet risk of most of the large money center banks is simply too high for me to feel like I could ever have a margin of safety owning the shares.
The regional banks are a different story; I am more comfortable with most of the large regional banks. They may be exposed to the economy and real estate markets, but they don't really have the exposure to trading risks and derivatives that the money center banks have developed in the past decade. My true preference is to own the smallest community banks, but it looks like a decent trade is developing in the larger regional banks after the recent steep decline in the market. Some of these stocks are flirting with the 2009 lows in spite of substantial improvements to their balance sheets since then.
Key Corp. (KEY) has seen its stock get slashed by 25% in the past few weeks. The stock currently trades at $6.50, not far above the $5 price hit at the bottom of the market two years ago. The shares currently trade at just 70% of tangible book value.
I wish management hadn't taken money out of loan-loss reserves last quarter, but the credit quality of its loan portfolio has improved substantially. Nonperforming loans are down to less than 2% of outstanding loans, which is close to being best-in-class among the regional banks. The bank did an equity and debt offering earlier this year and used the proceeds to repay its TARP loans. The $140 million in dividends that are saved by this move will now flow right to the bottom line for the regional bank. So will the better than $300 million the banks has cut from expenses in the past year. I expect this stock to trade back up to its tangible book value of $10.19.
Regions Financial (RF) has also seen its share price plunge in the recent market decline, falling back close to its lows of the credit crisis. The stock is currently trading at just 50% of its tangible book value, making it one of the cheapest large regionals on a price-to-book value basis.
The bank is seeing some signs of credit improvements but has had very sluggish revenue growth as it fights its way back to more normalized earnings. Regions has still not paid back its TARP loans; management has said it want to do so "in a shareholder-friendly manner." After settling SEC charges against its brokerage and asset management subsidiary Morgan Keegan, Regions is now exploring strategic alternatives for that firm. I think the stock can recover fairly quickly back close to the $7 level over the next few months.
The large regional banks are once again close to being priced for the end of the world. I don't think the end is nigh -- this is just another bump along the journey to an eventual recovery for the banking industry. These two names should recover nicely between now and the end of the year.