It's easy to see the appeal of banking stocks. Many of them sport low price-to-earnings (P/E) ratios while trading below tangible book value. My favorite bank stock -- Citigroup (NYSE: C) -- for example, still trades for just 57% of tangible book and less than seven times projected 2013 profits, even after a recent 20% gain during the past month.
Yet many major banks, with operations across the globe, still remain vulnerable to shockwaves emanating from Europe and elsewhere. That's why they are so cheap. When the global risks fade away, these banks could post a huge rally.
If you can't stomach the risk that these big banks bring, then why not focus on the next tier? Regional banks possess many of the same traits as the large banks, but often have zero foreign exposure.
In the second quarter, the five regional banks in the table below all exceeded consensus forecasts, highlighting the fact that operations are a bit stronger than analysts have given them credit for. They all trade for less than 10 times earnings, making them inexpensive in terms of trailing profits and book value. It's worth noting that all are capable of stronger earnings once the housing market and the broader economy perk up.
The Regionals Remain Inexpensive
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Meanwhile, most trade for around book value, well below the 1.5-2.0 multiple to book that regional banks garner in a normalized economic cycle. The key profit drivers to come: rising lending activity, a reduction in nonperforming loans and an expansion in net interest margins as interest rates revert back to historical norms.
Craig Siegenthaler, who follows regional banks for Credit Suisse, says a rebound is already underway. He has found that the number of nonperforming loans at many banks has been steadily dropping. More important, lending activity appears to be picking up, especially as it relates to the housing sector and small business capacity expansions. "This tells us that pockets of construction demand are beginning to emerge," notes Siegenthaler.
My colleagues have already given some solid ideas if you are looking for high-yielding regional bank stocks. Amy Calistri, the face behind StreetAuthority's The Daily Paycheck, profiled this group back in February, while Carla Pasternak, editor of the High-Yield Investing advisory, took note of these regional bank stocks back in January.
But if you're talking about the biggest regional banks, then it becomes a challenge to single out a specific stock, as they tend to trade in tandem on the backs of broader sector interest. That is to say, a rising tide will eventually lift all boats.