Can Smaller Banks Save the Day?

It is probably wrong to lump all banks into a single category. Many smaller banks have none of the exposure that the larger banks have, but their P/E multiples have been beaten down anyway. At current levels, raising additional capital for these small banks is not a matter of goig to Dubai, but instead to local and regional investors. If at the same time, the rules of lending for them is changed a lot, it will impact their reports which will be needed in due dilgence and impair their growth and the growth of the overall economy.

As the U.S. moves from being a consumer driven economy to an export driven economy, these smaller banks will be the front line for working with small and intermediate size businesses to help them with their export financing. This will require investment, and it should be private investment. In the third quarter, as much as 40% of the growth in our GDP came from export related activities.

The alternative is to have these smaller banks aggregate, since it will be selected bank management teams that are the most likely to attract the growth capital that will be needed. The highest probability will be for these banks to aggregate, since the increasing level of sophistication that will be required to service customers will require increased specialization of staff, and more staff depth. It will also require new capital.

As the economy changes, the small and intermediate size banks will be taking the lead in helping the U.S. return to a positive GDP growth rate that is acceptable. We need some aggressive new programs to make sure that these banks are equipped to help. They are the first line of defense in U.S. job growth, since most growth will come in small to intermediate sized companies.

Small banks, with clean loan portfolios, selling at 7-10 times earnings, are an excellent buy today.

Disclosure: none