5 Turnarounds in Regional Banking

06/26/2015 9:00 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

Everyone, it seems, expects interest rates to rise…one of these days. When that finally happens, lending margins, and therefore, bank profits, will begin to improve, suggests George Putnam, editor of The Turnaround Letter.

Also, the banks are learning to live with all the new regulations that have been heaped on them over the last few years.

Finally, as the banks’ balance sheets continue to improve, they will be able to increase their dividends and stock buybacks, both of which should have a positive impact on stock prices.

The stocks of the banks discussed below are among those that look particularly attractive to us at this time:

City Holding (CHCO) offers banking, trust and investment management and other financial products principally in West Virginia, Virginia, Eastern Kentucky, and Southeastern Ohio.

While a large portion of the firm’s loan portfolio is residential mortgages (54% as of December 2014), City Holding survived the financial crisis without any equity infusion and without cutting its dividend.

They’ve done a good job managing problem loans, and in January, sold their insurance unit to better focus on core banking operations.

Comerica (CMA) made a conscious decision to expand beyond its Michigan roots about ten years ago. As a result, it now also operates in Texas and California, as well as Arizona, Florida, Canada, and Mexico.

This expansion added to the bank’s issues during the 2008 meltdown, but it has recovered well. A number of analysts believe that Comerica is particularly well positioned to benefit from rising interest rates.

Huntington Bancshares (HBAN) is a diversified regional bank that offers a full spectrum of financial services. Ohio, Michigan, Pennsylvania, and Indiana account for the lion’s share of branches.

The company also has a strong auto lending business.  An ill-timed $2.1 billion acquisition of a mortgage lender in 2007 led the company to seek a Fed bailout during the crisis.

New management took over in 2009 and they have transitioned the company to a more stable operating model with higher levels of customer satisfaction. 

The three largest markets for KeyCorp (KEY) are Ohio, New York, and Washington, but it has a top-ten market share in eight states. Following more than $5 billion in credit losses, a new CEO took over in 2011 and she has refocused the bank around basic core services.

They are expanding commercial/mortgage lending and re-entering the credit card market. Building strong relationships with mid-sized businesses and cost cutting should lead to improved results and a stronger balance sheet.

Zions Bancorporation (ZION) expanded beyond its original Utah base in the 2000s into what were then high-growth markets such as Las Vegas. But those were some of the markets hit the hardest by the real estate collapse late in the decade and the bank has been slow to recover.

Zions was the only bank to fail the Fed’s stress test in 2014, although it did pass in 2015. Both the bank and its Western markets now appear to be on the rebound.

With the stock trading no higher than its initial post-crash rebound high in early 2010, Zions has speculative appeal.

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