Since the 2008 recession, the stock market has rebounded significantly, however, some industries, banks in particular, remain feared by investors. Even though banks have rebounded with the overall market, investors remain cautiously optimistic about banks. The investment community is cautious because even though most banks have paid back their Tarp funds, passed stress tests, re-instituted/increased dividends and/or re-instituted/increased share buybacks, there remains numerous unanswered questions when it comes to banks: (a) will interest rates rise?, (b) if so, when?, (c) how will the rise in rates affect the housing market, loans and lending overall?, (d) how will banks grow their book in this environment?, etc. Therefore, investors lack the trust they once had in banks which is common after such a downturn.
I believe that investors' concerns regarding the risks of investing in bank stocks are overblown at this point. Banks are solid investments and can generate a solid return. Sure they are not exciting but at these multiples it is only a matter of time before more fund managers and equity groups apply more of their capital into the sector driving up stock prices.
Not to mention the fact that consolidation in the banking sector, what I view as the exciting part of bank investing, is very common. Consolidation in the banking sector has been akin to walking down the streets of Detroit at night: absolutely silent for the past several years given the oversight/regulation of the government on the financial sector. However, as the government continues to loosen its hold numerous banks will attempt to grow their stagnant books by buying up their competitors.
Now turning to the heading of this article. I believe that bank stocks are undervalued when compared to the rest of the market. With that being said, I am no magician and have no idea when the investment community will fairly value the banking sector.
What I do know is that most regional banks are now trading above or well above their book value with the exception of a few. It therefore appears that there are a few bank stocks that are undervalued within their own sector. Some of these banks may have internal issues which is likely the cause of the discrepancy between their price/book when compared t their peers, while others appear to be simply undervalued.
The following table comprises a list of 14 mid-size to large regional banks as shown by their market caps. I have selected regional banks having a market cap of approximately $3B or more. The chart also shows the book value, the current price and price-to-book of each bank.
|Regional Bank||Market Cap.||Book Value||Current Price||Price-to-Book|
|Regions Financial (RF$)||$13.99B||$11.69||$10.18||0.87|
|Huntington Bancshares (HBAN$)||$8.04B||$7.17||$9.91||1.37|
|Key Bank (KEY$)||$11.90B||$11.65||$13.71||1.17|
|First Niagara Bank (FNFG$)||$3.04B||$13.55||$8.72||0.64|
|Fifth Third Bank (FITB$)||$17.02B||$16.74||$20.51||1.22|
|PNC Financial (PNC$)||$45.81B||$75.68||$85.20||1.12|
|BB&T Bank (BBT$)||$26.86B||$29.57||$37.53||1.26|
|Sun Trust (STI$)||$20.17B||$40.21||$38.22||0.95|
|M&T Bank (MTB$)||$16.31B||$82.89||$124.41||1.49|
|Zions Bank (ZION$)||$5.91B||$30.77||$29.36||0.95|
|First Horizon National (FHN$)||$2.88B||$9.43||$12.34||1.29|
|New York Community Bankcorp (NYCB$)||$7.06B||$13.02||$16.06||1.23|
*market cap figures from Yahoo Finance as of August 29, 2014, and all other figures from Yahoo Finance as of September 2, 2014.
Based on the above table you will note that most regional banks are trading above their book value. The average price-to-book of the above 14 regionals is 1.139.
Only 4 of the 14 above regionals trade below book. Zions and Sun Trust are trading slightly below book. Zions price-to-book is understandable as it failed the last stress test. Sun Trust is unexplainable as it appears to be in just as good as shape as those regionals trading above book value.
The other 2 are Regions and First Niagara. First Niagara trades at the lowest price-to-book multiple because investors are disappointed that the company intends to spend approximately $200-300 million on upgrading its technology as opposed to slashing expenses which most banks are doing these days. Regions, like Sun Trust, on the other hand appears to be trading below book value for no good reason.
It therefore appears that Regions and Sun Trust stand out as good values among the regional banks for the short and long term.
I am long Regions as a shareholder and do not currently have a position in Sun Trust, nor do I intend on taking a position in the short term.
Disclosure: The author is long RF.