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Regional Banks: Left Out in the Cold - Geopolitical Investing Strategies


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After the great melt down of the banking industry of 2008, most banks have already turned themselves around and are seeing better earning compared to those dark years.  Granted with the interest rates still at their all-time lows things could be better.  But, it is what it is.  Nonetheless, the baking industry has approximately 252 out of 926 stocks within 10% of their 52 Week lows.  And that makes it one the lowest ranking industry going by those listed on a 52 Week basis.  Therefore, this sector may be fruitful for the value investors to do some additional research.

 In time the economy will improve and along with it so will the interest rates accordingly.  However, a smaller number of regional banks have not seen the levels rise.  In contrast, they are priced way below the levels seen back in the 2008 time table. Looking at an ETF that tracks regional banks, you can see a trend.  For example, take (KRE) SPDR S&P Regional Banking ETF that trades on NASDAQ.  The performance for 5Yrs was 7.49% (2010), 3Yr= 6.67%, 1Yr= -11.20 (2015), 3Mth=-22.74, 1Mth= -4.34 and YTD= -16.34%.  So you can see the trend going back to 2010 but ran into the negative numbers starting with the one year figure.

 This begs the question of why the down turn in this sector.  Well, first off, smaller regional banks find themselves at a major disadvantage compared to larger banks when it comes to the competitiveness in a low interest rate environment. Second, since they are smaller, they do not have the large scale advantage of their much bigger counterparts.  Specifically, their costs are higher.  Third, unlike the big boys, they are not too big to fail.  And last, the influence of the Dodd-Frank law that passed as a result of the bank failures of 2008 with the intent to reduce the chance of this event occurring again, as had some untended consequences.  Namely it has had a very negative impact on the smaller banks.  The laws rules and regulations apply across the board with no regard to a banks size.  In short, their cost of capital is much higher than the large banks.  If a bank has more than $1B in assets their cost of capital is about 0.39%.  If a bank has less than $1B it is 0.64%.  This chart shows the number of deals by their size.

Therefore, the smaller bank has a higher overhead to deal with.  If you put together both the low interest rate and this added cost of capital, you can begin to see why smaller banks have been left out in the cold.  What are they to do?  They need to change their basic business model to stay in the game.  This might include: increasing their service fees, close up shop, move into other markets like insurance, offering different types of loans, acquire other banks to increase their scale, merge with banks that have an existing presents in a new geographical area that would give them access to new customer to expand their base, and the like.  Here lays the potential for value investors to benefit from this special situation that has been created by this combination of events.  Port Wren Capital, LLC, was able to spot this trend and we invested in a few impacted bank. You can see our gains on OmniAmerican (OABC), Columbia Bank (COLB), TowneBank (TOWN), Kearny Financial (KRNY), Northfield Bank (NFBK), and Atlantic Capital Bancshares (ACBI) following the ticker links. Additionaly, you can see the Buy Research Reports on TowneBank (TOWN) and Atlantic Capital Bancshares (ACBI) following the ticker links.

We have disclosed some specific investment opportunities using the above strategies to our subscribers in our PWC STOCK REPORTSSM subscription service. They have access to our security analysis pointing to undervalued companies with above-average returns over the long-term.  

At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.

 

Published: 8/1/16

 

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