A limited exposure of many regional banks to toxic mortgage-backed securities and the subprime mortgage malaise during the 2008 global financial crisis has helped the banks buttress their balance sheets in the aftermath of the global financial crisis. Strong lending portfolios with declining delinquencies and lower loan-loss provisions have boosted performance of many regional banks.
Many market observers suggest that the business outlook for U.S. regional banks has improved. While the low rate environment has compressed spreads, declining mortgage rates to record lows have boosted mortgage-related revenues and profits. For example, in the first quarter, revenues from mortgage refinancing activity doubled at Fifth Third Bancorp (FITB). M&T Bank Corporation (MTB) also recorded a 24% jump in mortgage revenues, while PNC Financial Services Group (PNC) reported an 18% rise in mortgage revenues. Acceleration of the economic recovery in the first quarter and improvement in the employment picture have supported higher lending volumes to consumers and businesses as well.
Increased lending and better loan performance has propelled the shares of many regional banks in recent months. In fact, shares of regional banks were among the best performers in the first quarter. However, while regional banks today appear to be less risky than major money center banks, they are still highly susceptible to the cyclical nature of their credit lending business.
The U.S. economic expansion is fragile and there is an increased likelihood that it will revert to a recession, dragged down by a declining global economy. Despite low interest rates, the pool of potential refinancers with good credit quality is shrinking. Weakening employment growth and lackluster business spending indicate that the bank lending environment is deteriorating. As the overall conditions deteriorate, so does the investment potential of the regional banking stocks. Despite the recommendations from some analysts that regional banks currently represent good value investments and alternatives to large money center banks, in the near-term, investors should steer clear of the financial stocks, including those of regional banks.
Here is an overview of five dividend paying regional banks.
M&T Bank Corporation is the 28th largest U.S. financial institution by asset size. The bank has a total market capitalization of $9.8 billion. M&T Bank is expected to grow its earnings per share (EPS) by 11.7% this year, and to maintain a similar average annual growth rate for the next five years. Analysts have based their forecast for EPS growth on a robust economic recovery. The company has a price-to-book ratio on par with its own five-year average and higher than the industry's price-to-book ratio. The bank's P/E is below both its industry average and that for the S&P500. M&T Bank pays a dividend yield of 3.5%, twice that for the industry, on a payout ratio of 45%. Investing legend Warren Buffett's Berkshire Hathaway reported a 4.26% stake in the company at the end of the first quarter of 2012.
BB&T Corporation (BBT) is a $19.3 billion bank and the 17th largest U.S. financial institution by asset size. Analysts project that the bank will boost its EPS by 57% this year, followed by a more modest 11.3% average annual growth for the next five years. This forecast is based on an expectation of a solid economic rebound. The company has a price-to-book ratio above the industry's average and its own average ratio over the past five years. The bank's P/E is slightly above that of the broader market and well below the industry's average ratio. BB&T Corporation pays a dividend yield of 2.7%, which is a full percentage point above the average for the industry. The bank has a dividend payout ratio of 38%, which indicates sufficient space to boost dividends in the future. In the first quarter of 2012, guru investor Ken Fisher increased his position in the bank by 312%. Ray Dalio initiated a small position in the same quarter.
PNC Financial Services Group is the 11th largest U.S. bank by assets. Analysts forecast that the bank will boost its EPS by 12.4% this year, followed by a more modest 6.3% per year, on average, in the next five years. The company has a price-to-book ratio slightly above the industry's average ratio and below the bank's five-year average ratio. Its P/E is well below that for both the industry and the S&P500 index. The bank pays a dividend yield of 2.7% on a low payout ratio of 29%. Fund manager Ken Fisher reported ownership stake of 5.9 million shares in the first quarter of 2012. Last quarter, Andreas Halvorsen purchased a small stake in the bank.
Huntington Bancshares (HBAN) is the 32nd largest U.S. banking institution by asset size. The bank beat earnings estimate for the first quarter and is expected to grow its EPS by an average rate of 5.6% a year for the next five years. The company boasts a price-to-book ratio well above its own five-year average and the industry's average ratios. The bank's current P/E is well below its own five-year average ratio and that for the banking industry. Huntington Bancshares pays a dividend yield of 2.5% on a low payout ratio of 26%. Guru investor Ray Dalio has significantly reduced his small stake in the company.
Fifth Third Bancorp is the 22nd largest U.S. banking institution by asset size. Analysts expect the bank to grow its EPS by a very modest 5% a year for the next five years. The bank is undervalued, given that its price-to-book ratio remains below the average ratio over the past five years. The ratio is on par with that for the industry as a whole. The bank's P/E ratio is lower than the company's average ratio over the past five years as well as the industry's P/E ratio. Fifth Third Bancorp pays a dividend yield of 2.5% on a low payout ratio of 21%. Financier George Soros' Soros Fund Management acquired a new stake in the company in the first quarter (see Soros Fund Management's portfolio).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.