Finding Value in Midwest Regional Banks
Last month, I took a look at some regional banks, breaking it down by region. When I looked at the Midwest region, I found nine banks that I felt that would be good investments. Now that earnings season is mostly over, I thought it would be a good time to see if the quarter helped any banks move or enter the rankings. Regional banks may also see an increase as customers of larger banks vote with their feet and move to local banks.
What is the Midwest?
When looking at the regional banks, it is important to note that some of the regions have some overlap. The Midwest region spans primarily from Minnesota to Ohio and south into Kentucky. Region-leading Huntington Bancshares (NAS: HBAN) is headquartered and has most of its offices in Ohio, but also has locations outside the Midwest in Pennsylvania and West Virginia.
Screening factors
As done previously, I will rank the banks based on four factors: P/E ratio, P/B ratio, dividend yield, and net income margin. Only banks with a market cap over $300 million will be included.
Profitability is important, so I first eliminated all banks without earnings over the past 12 months, looking for the cheapest bank according to this metric. My second factor is P/B ratio. In the banking industry, a value of 1.5 is reasonable, and the adage I like is "buy at half, sell at two." Only banks that pay a dividend will be included -- the higher the better. Finally, net income margin will be used as another method of comparing the banks' profitability.
Instead of further screening based on a higher dividend yield, I ranked all 18 banks that met the minimum requirements. The top seven are presented here:
Company | P/E Ratio (TTM) | P/B Ratio | Dividend Yield | Net Income Margin |
|---|---|---|---|---|
Huntington Bancshares | 9.7 | 0.77 | 3.3% | 20.4% |
Fifth Third Bancorp (NAS: FITB) | 9.9 | 0.80 | 2.8% | 21.5% |
Chemical Financial (NAS: CHFC) | 13.0 | 0.88 | 4.3% | 17.4% |
First Financial (NAS: THFF) | 11.8 | 1.17 | 3.0% | 26.4% |
Park National (ASE: PRK) | 13.3 | 1.17 | 6.5% | 19.6% |
FirstMerit (NAS: FMER) | 12.8 | 0.95 | 4.7% | 16.5% |
1st Source (NAS: SRCE) | 13.1 | 1.10 | 2.7% | 21.3% |
Regional averages | 14.6 | 0.74 | 2.1% | 0.7% |
Source: FinViz.com, TTM = trailing 12 months.
Quarterly results cause changes
Region-leading Huntington Bancshares' strong quarterly earnings, in which net income increased 76% over last year, helped keep it at the top of the region's rankings. Only a recent uptick in share price has caused its ratios to go up and its yield to go down. By cutting my original list from nine to seven, I eliminated banks such as Northern Trust, First Financial Bancorp, and First Busey, but 1st Source makes the list based on its higher income margin. In my previous Midwest bank article, commenter CROIC urged me to look at Berkshire HathawayholdingUS Bancorp, which, unfortunately still did not make my list.
Regional opportunities abound!
While the real lesson from Bank Transfer Day will be learned in the coming months, regional banks offer a better investment in the months ahead. Keep an eye on Midwest leader Huntington Bancshares by adding it to your free My Watchlist today.
At the time thisarticle was published Fool contributor Robert Eberhard owns no shares in the companies mentioned here. Follow him on Twitter @GuruEbby. The Motley Fool owns shares of FirstMerit, Berkshire Hathaway, Fifth Third Bancorp, and Huntington Bancshares. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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