Banks historically have been the best-performing stocks after a financial crisis. That’s right, even though the Western financial system teetered on the brink of collapse, Cramer still recommends buying these companies. But not all of them. In his newest book – Getting Back to Even – he’s largely focused on just the strong, regional outfits in position to take share from their weaker rivals.
Why the regionals? Because this is exactly the group that did so well coming out of the savings-and-loan crisis of the late 1980s and early ‘90s. As bank after bank went under, the Federal Deposit Insurance Corp. sold their assets to more stable institutions, and did so for a pittance, Cramer says. This allowed the survivors to transform from virtual unknowns into major industry players, making their shareholders tons of money in the process.
The credit crisis of 2007-2009 has given investors a twice-in-a-lifetime opportunity to generate some serious profits with the same strategy. Luckily for you, Cramer did a bit of preliminary research to find what he thinks will be the top regional banks to benefit most from the trend. His prediction? All five could double within the next three years.
Of course, the onus is on you to follow up with your own homework and decide if these stocks are right for your portfolio. But they certainly are a great jumping-off point.
Click ahead to find out which of Cramer’s favorites made the cut. (Note: These are in no particular order.)
Posted 25 Oct 2009
Is there any better gauge of a bank’s strength than its ability to turn down federal aid? Well, that’s just what this institution did when the US government was handing out TARP to any number of failing financials.
This Cramer fave also ranks high in the three categories that analysts use to rate bank stocks: capital reserves, or the amount of cash on hand to help withstand losses; nonperforming loans, those in or near default, which Cramer calls “the deadbeat ratio”; and net interest margin, the difference between what a bank pays you in interest and what it charges for loans.
Take a look at these numbers: This bank’s Tier One capital ratio, which regulators use to determine if a company has sufficient reserves, is 14%, more than 35% higher than the national average. The percentage of nonperforming loans to total loans is just 1.3%, while its peers carry 5.7%. And the net interest margin is 4.71% compared to the cohort average 4%. This latter figure may seem like a small difference, but it can have a big impact on earnings.
So, who is this?
The bank runs just under 100 branches in Montana, Washington, Wyoming and Utah, all of which enjoy some of the lowest unemployment rates in the country. Their population rates are increasing faster than the national average, too, providing Glacier with some innate, organic growth.
Besides being a great candidate for the FDIC’s asset sales, Glacier is always willing to do some acquisitions of its own, most notably Wyoming’s First Co. The company also pays a 52-cent annual dividend, which works out to about a 4% dividend yield. Best of all, though, Wall Street has all but ignored this stock, giving investors the chance to get in on one of the market’s best-kept secrets.
This bank holds up in all the categories that analysts deem important. Bad loans account for just 0.68% of the company’s portfolio, compared with 1.11% for its peers. Return on assets is a whopping 1.13%, leaving competitors’ 0.23% in the dust. And the 12.76% return on equity dwarfs rivals’ 2.38%. Also, the 11.49% Tier One Capital ratio is well above the 10% national average. These statistics make the FDIC more likely to tap the company the next time a financial goes under.
So who is this soon-to-breakout bank?
This Akron, Ohio, bank, the state’s fourth largest, holds $11.1 billion in deposits across 160 branches. Aside of the previously mentioned facts and figures, why does Cramer like it so much? Sure, there’s great management and a dividend that pays you to wait for the economy’s turn, but it’s FirstMerit’s weak competition that makes the stock so enticing.
PNC Financial, KeyCorp, Huntington Bancshares and Fifth Third all have problems for one reason or another. That puts FMER in perfect position to snatch up market share.
Cramer called this bank one of the more responsible lenders, as its charge-off percentage is just 0.28%, compared to the competitor average 0.51% – nearly twice the number.
The company’s nonperforming-loan, or deadbeat ratio, is better, too: 0.72% versus 1.03%. The Tier One capital ratio clocks in at 11.5%, which, again, is higher than the 10% national average. And this institution wants the feds of its back ASAP, so it’s paying off the $184 million it took in TARP funds.
Who is it?
Lockport, N.Y.-based First Niagara Financial Group knows how to take advantage of a good deal. The bank bought $4.2 billion in deposits and $839 million in solid loans for just $54 million when antitrust officials forced PNC to sell when it was acquiring National City. The deal, which grew FNFG’s deposits 70% and its branches 50%, is expected to increase 2010 earnings by 20 cents a share.
First Niagara is expanding into Eastern Pennsylvania through its purchase of Harleysville National, giving it almost 4% of the state’s banking business. This company’s acquisitions will bring down its tangible common equity ratio a bit lower than Cramer would like – to 5% from 9% – but he likes the 7% dividend yield. That’s a nice payout for investors until another great deal comes along.
This bank’s 18.7% Tier One capital ratio is the highest of any stock that Cramer follows, and it’s not because the company isn’t lending money. But this is a conservative player, besting its local competitors’ 1.85% loan delinquency rates, and the national average 3.8% rate, with a stellar 1% rate. Only the best of banks in the best of times can pull that off.
A small footprint means there’s opportunity here for expansion, especially as this region’s real estate market took its hit later than others. Throw in a top-notch manager and you have all the elements needed for continued growth in this business.
So...which bank is it?
Run by one of the most experienced East Coast bankers, Cramer says, Connecticut’s NewAlliance is anything but a subprime lender. Thank Peyton Patterson’s conservative lending practices for that.
Cramer expects the CEO’s superior leadership to grow his 89 branches in its home state and Massachusetts, as competitors buckle under the region’s growing number of defaulted mortgages. And the huge amount of cash on hand offers two benefits: The FDIC likes that when it’s looking for troubled-bank buyers, and it makes NewAlliance a very attractive acquisition for bigger financials. Either way, shareholders win.
This bank’s nonperforming-assets-to-total-assets ratio is a paltry 0.25%. How about the competition? 1.75%. Do the math: Rivals are seeing seven times as many defaults.
And there’s another category in which this outfit comes out on top in a big way: its tangible-capital ratio, which is 19.5% compared the cohort average 6.15%. That, of course, is three times better, and it equals a $2.7 billion buffer against industry turbulence. Also, loan defaults during arguably the worst parts of the credit crisis/housing slump held steady.
Can you guess who this is? Hint: It's another New England outfit.
Like NewAlliance, People’s United Financial operates out of Connecticut, and these two banks will share the spoils of the FDIC’s bad-bank auctions. People’s holds $20 billion in assets, or loans, $14 billion in deposits, and it’s among the top five in market share in Connecticut, New Hampshire and Vermont. Some of the company’s 300 branches are located in Maine, Massachusetts and Westchester County, New York, as well. And management plans to double or triple its assets over the next two to five years.
There is a “problem,” though. People’s United just has too much money on its hands, as seen in that 19.5% tangible-capital-to-assets ratio. No wonder this bank scoffed at the government’s TARP money. The company’s been putting some of that money to work, last year buying Chittenden, Vermont’s largest full-service bank, at a discount. There are plans to buy a Northeast commercial bank as well, and, of course, People’s is ready to take on whatever the FDIC has to offer. Soon enough, this midsized regional bank, Cramer says, could be a regional banking titan.