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Four Regional Banks to Watch


These banks look quite cheap to us. Many are currently trading well below their book value per share.


Although bank stocks have recovered somewhat from the drubbing they received last autumn, they still seem like the Rodney Dangerfield of the stock market. Every time a bank reports improving results these days, investors treat it with skepticism and disdain.

Because of this, my firm thought it was worth revisiting the banks, even though we have written about them several times over the past year or so.

Despite a number of headwinds-such as increased regulation-many of the banks look quite cheap to us. Many are currently trading well below their book value per share. Before 2008, many healthy banks traded at more than twice book value.

Today, earnings are improving, and the risks have been reduced. Most US banks have reduced their overall leverage significantly since 2008. In addition, the recent government "stress tests" should provide at least some measure of comfort.

Fifth Third Bancorp (FITB)
This bank has offices in 12 states, primarily in the midwest. The recession obviously hurt operating gains, and the stock fell in lockstep with the industry.

But TARP borrowings were repaid in early 2011, and recent operating results have been encouraging, as the company has refocused on its core businesses. We recommended the stock in the November 2010 issue, and we still like it.

Regions Financial (RF)
A Southeast regional bank whose operations are most heavily concentrated in Alabama, Florida, and Tennessee. The Florida exposure was definitely a hindrance during the financial crisis, and Regions was forced to accept a $3.5 billion TARP bailout from the Fed.

The recent sale of its Morgan Keegan brokerage unit for $930 million and the issuance of 152.9 million shares led to Fed approval to finally pay back the bailout. The stock has rallied with the market since last fall, but remains at depressed levels.

SunTrust Bank (STI)
Though headquartered in Georgia, it's the largest bank in Central Florida; its next-largest markets are Georgia, Virginia, and Tennessee. The company is still recovering from the real-estate collapse in the Sunshine State.

SunTrust failed to pass the Fed's latest stress test, but that didn't phase investors, and the stock actually rallied on the news. The market must agree with us that SunTrust's prospects are improving.

Zions Bancorporation (ZION)
This bank's principal markets are Utah and California, but its reach extends from Washington to Texas.

Exposure to the collapsing real-estate markets in California and Las Vegas was particularly troubling for Zions in 2008-2009. But the company appears to be on the mend. As the west continues to recover, so will Zions.

Editor's Note: This article was written by George Putnam III in The Turnaround Letter.

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