Even among the broad-based market carnage of the past year, regional banks with heavy real estate exposure have been notably poor performers, according to turnaround expert George Putnam.
In The Turnaround Letter, he explained that while investors are still wary of this group, there are cases where the market has overreacted and the stocks will eventually rebound dramatically. Here, he looks at four favorite regionals.
'Many regional banking stocks are now trading at a small fraction of their 'book value.' In more normal times, most banks will trade for two to three times book value and sometimes more,' Putnam said.
'However, it can be tricky to pick the rebound candidates because banks are by their nature very leveraged, and a small increase in non-performing loans can often wipe out the stockholders equity,' he added.
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According to him, in searching through the long list of troubled banks, we decided to enlist the help of two groups of experts: federal banking regulators and sophisticated institutional investors.
'The four banks highlighted below have all been battered by their heavy exposure to some of the worst real estate markets in the country,' Putnam said.
'However, they have all received significant amounts of TARP (Troubled Asset Relief Program) money from the government,' he added.
Since even the federal government isn't likely to throw money at institutions that are about to fail, this suggests that the regulators have given these banks a reasonably clean bill of health. Moreover, each has recently raised new capital from institutional investors, according to him.
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'Of course, even the Feds and the big Wall Street boys can be wrong. (Who got us into this mess after all?) Therefore, you may want to buy a basket of several of these banks to diversify away some of the risk,' he said.
'Fifth Third Bancorp (NASDAQ: FITB ) has a deposit base that is largely in Ohio and Michigan, but it has an expanded reach throughout a number of rust-belt states,' he added.
A few years ago, the company diversified into Florida, which turned out to be one of the few areas hit harder than its home turf, according to him.
'The bank recently raised $1.1 billion in equity capital to assist in satisfying the Fed's stress test. Management plans to further strengthen the company's capital base by selling off 51% of its payment processing unit,' he said.
Keycorp (NYSE: KEY ), headquartered in Cleveland, has minimal credit card and auto loan exposure, and it sold its sub-prime business in 2006, according to Putnam.
'Nevertheless, it has suffered from other troubled segments of the commercial and consumer real-estate markets. Keycorp accepted $2.5 billion in TARP funding, and it has raised over $1 billion in new equity,' Putnam said.
'Regions Financial (NYSE: RF ) operates primarily in the Southeast. Having raised $2.5 billion in new capital, the company appears well positioned to survive further declines in its commercial real estate portfolio. Regions has been rumored to be an acquisition candidate,' he added.
SunTrust Banks (NYSE: STI ) operates a range of banking/financial operations throughout the Southeast. It has good earnings power from its banking and trust businesses, according to him.
However, the bank needs to overcome its heavy exposure to the troubled Florida real-estate market. SunTrust received $4.9 billion in TARP money and has raised nearly $2 billion in new equity capital, he added.