Big Banks Are No Longer Premium Holdings

by: Dana Blankenhorn


The biggest banks are coming under closer regulatory scrutiny.

They are no longer worth premium multiples.

Look for strong regional banks that can take share.

My son, a recent college graduate, probably said it best. "Bernie can stop now. They're breaking up the banks," he said.

Indeed, the "living will" test results, and the Administration action that will follow, are clear indications that big bank stocks should no longer command a premium in the market.

Indeed, they don't. Even a blowout quarter can't get JPMorgan Chase (NYSE:JPM) a Price/Earnings multiple much above 10. Citigroup (NYSE:C) is at 8, Bank of America (NYSE:BAC) at 11, Wells Fargo (NYSE:WFC) at 12, and Goldman Sachs (NYSE:GS) at 13.

It's not that these banks aren't making money, they are. For instance, Wells' loans were up 10%, and earnings were down only because it increased reserves by $200 million. Rising oil prices mean those reserves may not be necessary. (I have a few shares of WFC in my retirement account. Being in out-of-favor sectors is part of my diversification strategy, and WFC is generally well-run.)

State Street (NYSE:STT), which has a 13 P/E, and Bank of New York Mellon (NYSE:BK), which is at 14, were also subject to the tests and if they don't correct the plans by October, they could face higher capital requirements and limits on business activities. Failure to comply for two years would result in orders to divest assets. I don't understand why they are getting a premium over bigger banks that are doing well and also subject to these tests.

A lot of bankers, and a lot of Seeking Alpha readers, are going to scream bloody murder about this, as I have written this Administration no longer cares much of what its critics think. The President's approval ratings are rising, candidates supported by those critics are lagging. Betting on change in the political environment is a long-shot bet.

The right move is thus to look for smaller, regional banks, basing decisions on regional economies. Many of these stocks have still not recognized the advantages regulators are giving them, and have not capitalized on them. SunTrust (NYSE:STI), for instance, is still at a P/E of 11, serving growing markets in the Southeast.

The problem is that smart investors are realizing this right along with you, and the prices of good regional bank stocks are on the rise. In the Southeast, BB&T (NYSE:BBT) is at a P/E of 13.5. In the upper Midwest, U.S. Bancorp (NYSE:USB) is also at 13. While in the past you would evaluate smaller banks like United Bankshares (NASDAQ:UBSI), which is based in West Virginia, based on their value in an acquisition, now you need to examine their loan losses and the economies they serve. I happen to think UBSI looks toppy at 18 times earnings.

The sweet spot is going to be in banks that focus on basic banking, that are too small to interest regulators focused on systemic risk, that have sold franchises in their markets, and that serve growing regional markets. That means Huntington Bancshares (NASDAQ:HBAN) in Ohio, which is at 13 times earnings, BankUnited (NYSE:BKU), which serves New York and Florida, at 15 times earnings, and the previously-mentioned SunTrust, with the 11 P/E.

Please feel free to share your favorites.

Disclosure: I am/we are long WFC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.