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Bullish
on Regional Banking (and not just for near-term reasons) |
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Though the Micro
Cap Press analytical team is generally hesitant to take anything
at face value, sometimes, the obvious data is indeed the only data,
and should be taken for exactly what it's worth. Such is the case
with the regional banks right now.... they're up (again) today,
and based on real results, they may end up being one of 2010's leaders.
 You
can interpret that exactly how it sounds - as a bullish call.
On the flipside,
don't assume we're fair-weather friends, jumping on a hot group when it
becomes vogue to do so. We know too well that one-day-wonders have a tendency
to fizzle out fast (particularly in the current environment). No,
we've got some specific reasons why we expect the regional banks' current
strength to persist for quite some time... and it has nothing directly
to do with President Obama's decision to tax the daylights out of the nation's
biggest banks.
First things
first though; let's start with recent results.
Though
the big banks and brokerage houses dominated the media on Tuesday and Wednesday,
a handful of smaller banks squeezed in their numbers as well. Two of Wednesday's
announcements included U.S. Bancorp (USB), and M&T Bank Corp.
(MTB). In both cases, earnings were well up from the same quarter year
earlier.
 For
U.S. Bank, earnings per share doubled. Though the bar was set low due to
severe weakness a little over a year ago, U.S. Bank still outshined the
bigger names while doing business in the same environment as the larger
banks, with the same pitfalls. Some critics accurately note that U.S. Bank
increased charge-offs on bad loans by 6.1%. There's an added detail though...
the total loan portfolio increased by 8.0%. On a relative basis,
U.S. Bank's charge-offs are actually dwindling.
M&T Bank
simply improved earnings by 34%. And, it did it the old-fashioned way...
it earned it. Loan losses were lower on a y-o-y basis.
Though the larger
banks were a little more hit and miss on loan losses, they were still heavy
on the 'miss' side of the table. For instance, Wells Fargo (WFC) saw
a 22% increase in bad loan charge-offs.
And the trend/disparity
followed through to today, when other regional banks like Fifth Third
Bancorp (FITB) and KeyCorp (KEY) chimed in. KeyCorp narrowed
its loss on higher revenues. Fifth Third took a loss as well, but easily
bettered the big loss from the same quarter a year ago, and topped analysts'
estimates for last quarter.
Both stocks
were up big on what was admittedly mediocre news... at best. Yet,
there was still enough optimism to spark some buying' just think what could
happen when the news is really good.
More small banks
are set to report earnings next week, and we expect to see the same theme
- better numbers, and if not profits now, then profits in the foreseeable
future. In other words, regional banking has turned the corner before
the large banks have. That's a long-term upside, even though all the
buzz feels like it's short-term in nature.
And on that
note, let's look at another reason why we're longer-term bulls on
the regional and small bank group. .
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Short-Term
Versus Long-Term |
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Though as capitalists
and investors we tend to politically lean to the right, even the editorial
staff of the Micro Cap Press will acknowledge a sense of vindication behind
President Obama's recently-unveiled bank tax. Huge banking and brokerage
bonus payouts for 2009 were tacky at best, and unfair to taxpayers at worst.
While the new tax itself will inevitably hurt some of the wrong people,
it at least sends a message to enough of the right people.
 The
tax, however, isn't a reason not to own large bank stocks.
Don't misunderstand;
as long as other investors think the tax is a major fiscal problem for
big banks, and they choose to gravitate to the smaller banks as a way of
avoiding the effects of the banking tax, so be it - that only helps
our bullish call on the smaller banks. The effect of it, however, will
be absorbed and forgotten within a few months.
In other words,
the upside of the large cap bank tax is temporary - we need something a
little longer-term. The return to profitability is one of those longer-term
upsides.
(On the off-chance
President Obama's tax does plague the big banks indefinitely, that will
continue serving as a relative boost for the regional banks' profitability.
Thus, the tax itself isn't a long-term threat to small cap banking at all,
and has the potential to become a long-term benefit to the smaller banks.)
We're also seeing
bullish technical patterns from the S&P 1500 Regional Banking
Index.
 The
nearby chart of that index shows a clear break above what had been a troubling
resistance level for the group as a whole. The ceiling, around 52.50, was
snapped three weeks ago, releasing the S&P 1500 Regional Bank Index
from its shackles, and freeing it up to move higher.
The chart's
momentum isn't even the exciting part to us though. What we're eyeing is
the amount of recovery room these stocks have in front of them.
Bluntly, this
group took more than its fair share of the 2008 beating. The index started
to fall in early 2007 (correctly prediction what was coming) after peaking
at 145.44. Currently at 55.00, the S&P 1500 Regional Bank Index - and
its underlying stocks - could more than double in value before running
into prior highs. In comparison, most other sectors and industries don't
have that much room left to run. As such, most other sectors don't have
as much upside to tap. This is the nature of sector rotation... an
idea we discuss frequently.
In any case,
we're bullish on the group now. We can't actually recommend Fifth Third
Bancorp or KeyCorp, simply because we know there are more attractive companies
out there. And yes, U.S. Bancorp and M&T are two of the more attractive
ones (though both are overbought right now).
If you dig deeper
though, you'll find even more undervalued gems buried in the bunch. Just
be sure the charts are technically sound and not overbought once you find
a regional name with the right fundamental outlook. The wind is now at
their back. Check the blog in a few days - we'll post some specific stock
ideas there soon.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
