Investing in Regional Banks

[Gallagher]

Looking for thoughts on investing in this sector. I think the regionals may recover in advance of an economic recovery, especially in the southeast where the political and business climate is favorable.

 

[Vinson]

I read your blog and i am agree with you . This region is safe and sound because this are can not heavy affected by depression of economy.This place is best for investment and there would be more profit .

 

[Toro]

I bought a basket of regional banks a few years ago near the bottom of the market and over the next 18 months. I blew them in the late Spring / early Summer because they were acting poorly. I screened for banks which made money throughout the crisis, were trading below tangible book value, had positive earnings estimates going forward and had a stock price greater than $2. This was meant to find banks of quality, ones that didn't make stupid loans. Of the 535 banks I follow, about two dozen met that criteria, so I bought them. Many of the banks were tiny banks in Podunk which traded by appointment.

However, they didn't make that much money. They made a little but not as much as I thought. Instead, it was all the shit banks that made money, the ones that were on life support as their stocks went up 500% or more off the bottom.

The fundamental problem is that the regional banks still have too many bad loans, and the Fed is narrowing their net interest margin through Operation Twist. Interest rates at 0% lowers bank earnings by 30%-40%. Operation Twist will make it worse.

Also, if you look at how industries that collapse after an asset bubble, they don't usually outperform the market. At best, they trade in line with the market for many years thereafter. That's what tech did after the Tech Bubble collapsed in 01-02. I expect the banks to do the same.