Banks May Actually Be a Buy

05/25/2010 12:30 pm EST


Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, says regional bank shares have been beaten down to where they look attractive for long-term investors.

If you want to make back some of the money the banks helped you lose with a mortgage crisis that nearly took down the economy, hold your nose and invest in them.

As time goes by, more people will warm up to banks, realize they aren't all so bad, and join the trend, driving up the bank stocks. Indeed, if history is any guide, bank stocks will outperform the market for the next decade—the typical pattern for the stocks in the sector that causes a major market meltdown.

Those too-big Wall Street banks so tied to the crisis aren't the ones with the most potential. You'll find a richer mix of prospective stock winners among the regional banks.

Most banks currently trade for about one to two times book value (the value of bank assets minus their liabilities). Historically, they have traded for two to three times book value. This suggests plenty of up side.

Many banks have also raised lots of money, [which helps] explain why a bank stress index from Institutional Risk Analytics declined to five in the first quarter from 21.5 in the fourth quarter, where one is the best possible score.
Other factors are helping regional banks:

  • Banks are finding it easier to make money. On average, net interest margins for regional banks advanced to 4.11% from 3.40% in the first quarter [of] the prior year, according to SNL Financial.
  • Banks enjoy cheap money because the Federal Reserve is keeping interest rates so low.
  • Loans, the lifeblood of banks, are rising. At commercial banks, the amount lent was up in the first quarter for the first time since the end of 2008, SNL Financial says.
  • Deposits at 7,200 regional banks were up $24.8 billion in the first quarter compared with the last quarter of 2009, says Dennis Santiago of Institutional Risk Analytics.

There are still a lot of banks that will go bust and get taken over by the Federal Deposit Insurance Corp. But the failures help the best banks because it means they can take market share. Citigroup estimates $169 billion in bank assets could become available in the next two years.

Don Wordell of the RidgeWorth Mid-Cap Value Equity Fund thinks that as conditions in Comerica’s (NYSE: CMA) markets like Texas, Michigan, California and Florida improve, the bank, [which lost $1.10 a share in the past year,] will earn $5.00 a share by 2013.

If Comerica's stock trades for 12x earnings a few years from now (a conservative assumption), this suggests it will reach $60 a share, from recent levels of $37.

Because the economy has improved, bad loans are declining. So banks need to set aside less to cover losses, and they free up old reserves. This helps earnings. And it lets bankers get back to banking.

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