Investors have been snapping up regional banks all year, driving many far above their book values.
Does it make sense? Based on the results announced yesterday by SunTrust (STI), heck yeah.
The Atlanta-based regional bank saw profits rise to $275 million, from $178 million a year earlier, even though revenue rose just 3%. After preferred dividends were paid, earnings per share were 50 cents, from 33 cents a year ago. The street's expectation had been for earnings of 44 cents/share.
The big difference was that the bank was able to reduce its provision for loan losses substantially, as the vast majority of loans performed.
What the SunTrust results indicate is that what is happening in Minnesota and Texas may be a more general trend. Some analysts, like Philip Van Doren of TheStreet.com, saw this trend coming from a mile away. He highlighted the prospects for STI back in January.
SunTrust was formed by the merger of a Florida regional, Sun Banks, and Trust Co. of Georgia, which until recently housed the Coca-Cola "secret formula" in its vault, as it was headed a century ago by Ernest Woodruff, whose son Robert became Coke's greatest leader. (The formula is now in the Coca-Cola museum downtown.) Trust Co. had always been conservatively managed, but it turned out to be lead dog in the combined company, and that strategy appears now to have been the right one.
It seems to be the right one for many regional banks.
Disclosure: I am long PB.