7 Smaller Bank Stocks To Buy Amid the Coronavirus Rout – Barron’s

7 Smaller Bank Stocks To Buy Amid the Coronavirus Rout  Barron’s

Photograph by Christopher Dilts/Bloomberg

The nation’s regional banks are particularly sensitive to the challenges posed by the pandemic. They have less diversified lines of business and loan portfolios and can be concentrated in one particular area. A regional bank in the oil patch, for instance, could not only see corporate credit lines tapped, but also it could face spillover effects from shuttered local businesses and out-of-work customers falling behind on their mortgages.

Their stocks reflect those worries: The KBW Regional Bank Index fell 40% from Feb. 20 through March 18, its worst 20-day decline since the index began in 2005.

The good news is that these banks are less exposed to commercial business than they have previously been. While loans to nonfinancial businesses are near an all-time high, according to Wells Fargo data, they make up 26% to 34% of bank assets. At the same time, capital positions are better than they were in the past.

With so many regional banks hit hard, opportunities are beginning to emerge. Of course, you have to know where to look—and that isn’t always easy.

About 40% of community banks disclose their exposure to retail and hotels, while only 36% disclose their exposure to energy companies, and 30%, to restaurants, according to Michael Young, a SunTrust Robinson Humphrey analyst.

The ones that do disclose their exposure have been hit hard. Some 18.1% of BOK Financial’s (ticker: BOKF) loans are tied to the energy sector, and its stock price is down roughly 58% this year. Other energy-exposed banks, like Zions Bancorp (ZION) and Comerica (CMA), have sold off about 50% and 61% this year, respectively. But they all look cheap. BOK trades at 0.82 times its tangible book value, below even its lowest levels of the financial crisis, while Zions and Comerica have also seen their price-to-tangible-book ratios fall near 2008 levels. These banks have experience in the energy sector that can help get them through the crisis.

With oil prices in the mid- to low $20s, exploration-and-production companies are likely to face bankruptcies, notes Gary Tenner, managing director at D.A. Davidson. In this kind of environment, he favors banks with less exposure to oil and other troubled areas. He points to First Foundation (FFWM), which does traditional banking but also wealth management and other services, as one opportunity. It has fixed-rate assets and a “greater magnitude of opportunity” to reduce its cost of funds, compared with its peers, Tenner says. It, too, trades below tangible book.

Investors could also look to some of the larger regional banks. Brian Klock, managing director at KBW, points to M&T Bank (MTB), PNC Financial Services Group (PNC), and U.S. Bancorp (USB).

The opportunities are there. Just don’t expect the ride to be easy.

Write to Carleton English at carleton.english@dowjones.com

Source: barrons.com

Leave a Comment