The Best Of The Beaten-Down Banking Sector

 |  Includes: BBT, JPM, PNC, SSB, USB
by: Matthew Smith

The banking business has not been great for many American banks as of late. The sector as an investment class has been abysmal for investors over the past 6 months. With that said, there are a few bright spots and places where investors could look for healthy banks and potential gains.

SCBT Financial Corp. (SCBT)

The bank is well off of its 52-week high; however, the bank is a healthy one. SCBT Financial has been a consolidator among the failed banks by participating with the FDIC over the last 2 years. Earnings appear to be increasing once again, and the company emerged from the financial crisis relatively unscathed and much better off than its peers.

The company operates in South Carolina (South Carolina Bank & Trust), Georgia (Community Bank & Trust) and North Carolina (North Carolina Bank & Trust). According to the company’s website, its market cap is $398 million and it has assets of approximately $4 billion. The company is large enough to offer the services that the large national banks, such as Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC), offer for wealthy clients, and this enables it to compete with the big boys while also offering the community touch that its smaller rivals offer.

The company has a dividend of $0.68/share, which currently yields 2.4%. With Wells Fargo undergoing the conversion of its branches to a new name in the area, and Bank of America joining it in initiating fees for debit cards, we could see SCBT take market share in South Carolina, North Carolina and Georgia.


BB&T Corp. is the second largest bank in North Carolina (previously the largest until the latest round of mergers prior to the financial meltdown), a fact lost on many investors, as the company is overshadowed by its larger peers Bank of America and Wells Fargo. BBT was one of the top 20 US banks which actually came out of the financial mess with minimal damage. The company hunkered down and focused on getting its ship in order, which allowed it to take part in an FDIC-assisted acquisition of Colonial Bank and has enabled the company to maintain a $0.64 dividend, which yields 2.8%.

Helping BB&T is its diversification among revenue streams. The company generates most of its revenues via community banking, insurance and advising/brokering businesses. The company looks to be best positioned among the banks that the US government made take part in the Stress Tests, and has announced that it plans to pay out 30-50% of earnings via dividends.

JPMorgan Chase (NYSE:JPM)

Say what you want about JPMorgan’s recent earnings announcement, but JPM is one of the few banks still out there with the ability to finance huge deals for Corporate America. The company is trading near its 52-week low and well off of its highs, however JPM has a $1/share dividend and yields 3.1%. The company is bulking up in California and the Western US, and it is fair to say it is open for business.

The company is going to be one of the few able to actually grow its presence via new branch openings and actually lending to consumers. The company has arguably one of the best management teams in the industry, and Jamie Dimon is considered by many the top CEO as well. Although investors were disappointed with the recent earnings release this past week due to lower revenues, the company is buying back shares, and wil be releasing reserves, which will boost earnings over the next few quarters, assuming the industry remains constant.

PNC Financial Services (NYSE:PNC)

PNC Financial Services is a $26.92 billion market cap bank based in Pittsburgh, Pennsylvania. The company owns a 21.7% stake in BlackRock (NYSE:BLK), the country’s premier asset manager. PNC was quite active in FDIC-assisted acquisitions, with National City being the largest acquisition it were able to purchase during the financial meltdown. PNC is one of the best franchises out there, and it is expanding its brand across the country. This is best displayed by the recent announced acquisition of $3.45 billion for the US banking franchise of Royal Bank of Canada (NYSE:RBC); it is reported PNC beat out BB&T for this deal.

PNC has a dividend of $1.40/share and yields 2.7%. As the company continues to integrate its purchases and realize the savings from these acquisitions, we think earnings will increase further. Another key point for investors to keep in mind is the reserves that the company can release as the economy improves, which will help increase earnings and provide cash to increase the dividend, fund further acquisitions or engage in share buybacks.

US Bancorp (NYSE:USB)

US Bancorp is another of the top 20 banks in the US. USB is currently trading in the middle of its 52-week range, offering investors an opportunity to buy into this great banking franchise. The company has a great reputation in the industry and is quite conservative, which is why it was able to acquire numerous institutions from the FDIC and gain billions in deposits, not to mention the numerous branch locations across the Western US and near its Midwestern operations. USB has positive earnings, room for further earnings expansion via drawing on its reserves, and it faces less of the issues its troubled peers do in the mortgage market (i.e., Bank of America having to buy back mortgages with origination issues).

The $45 billion market cap bank has long-term goals to grow revenue by 7-8% in an environment based off of current regulations as well as those coming online in the near-term. Net income growth is pegged at 8-9%, and EPS should increase by 8-10% (the discrepancy resulting from share buybacks). USB currently has a $0.50/share dividend and a yield of 2%.

Although there are a few banks which appear to be weighed down with issues going forward, we believe that these banks will be the ones that benefit long-term from having strong balance sheets and no legal issues hanging over their heads. The icing on the cake is that each of these companies will pay you to sit around and wait for capital appreciation, and investors can expect the dividends to increase over time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.