Bank Stock Portfolio: Robust 17.63% After Three Months

by Gene Kirsch, Senior Banking Analyst | April 27, 2012

See also: Weiss Ratings Series – U.S. Bank Portfolio

The 14 undervalued bank stocks we selected as good investment value in January are up a robust 17.63% which is not bad at all for stocks in a sector that is still recovering from the financial crisis.  

If you recall, the recommended stock portfolio was selected from the 1,190 publicly traded banks rated by Weiss for financial strength that met the following criteria as of January 26, 2012: 

  • positive earnings per share
  • current stock price to tangible book value less than 90%
  • current stock price at least 10% off its 52-week high
  • forecasted stock price based on next year’s earnings greater than its current stock price

The assumptions to arrive at the recommended price target were fairly conservative using an 11.62 P/E compared to the historical average of 14 for all publicly traded companies, and the forecasted EPS was the average of all analysts reporting on that bank for the most recent fiscal year of 2012.

Once again, we take a look at KeyCorp (KEY) as an example. It traded at $7.88 per share as of January 26, with a book value of $9.10 on September 30, reflecting a ratio of 87%. At the time, the bank was trading at a 19% discount from its February 15, 2011 52-week high of $9.77. Based on an average P/E of 11.62 and forecasted EPS of $0.89, we projected a 12-month price target of $10.34 or an increase of 31.3%.  Disappointingly, KeyCorp, the most highly rated bank in the group, was the worst performing in stock price over this three-month period, at 1.90% on average 10-day volume of 21.7 million shares ($8.03 per share).  This less-than-stellar performance may be a reflection of investors pulling back on large-cap bank names and taking profits in April.  KeyCorp, which was up almost 6% at our last monthly review (at $8.36), was one of those banks caught up in the profit taking. 

So let’s take a look at how the remaining undervalued banks in the portfolio have performed relative to the market, peer group and industry benchmarks, as a three-month performance evaluation. See full original table in January article.

Institution Name
Ticker City State Weiss Financial Strength Rating 1 Stock Price as of 1/26/12 Current Price 4/24/2012 % Change from 1/26/12 to 4/24/12
1st Constitution Bancorp FCCY Cranbury NJ      C+ 7.30 8.24 12.88%
Bank of America Corporation BAC Charlotte NC      D+ 7.30 8.21 12.47%
Bank of Commerce Holdings BOCH Redding CA      C 3.73 4.33 16.09%
Central Valley Community Bancorp CVCY Fresno CA      C- 6.13 6.90 12.56%
Citigroup Inc. C New York NY      C 30.38 33.42 10.01%
Evans Bancorp, Inc. EVBN Hamburg NY      C- 12.46 14.45 15.97%
Fidelity Southern Corporation LION Atlanta GA      D 6.56 8.19 24.81%
Hanmi Financial Corporation HAFC Los Angeles CA      C- 8.10 10.39 28.27%
Intervest Bancshares Corporation IBCA New York NY      C- 2.84 3.97 39.79%
KeyCorp KEY Cleveland OH      B- 7.88 8.03 1.90%
MainSource Financial Group, Inc. MSFG Greensburg IN      C 9.17 11.76 28.24%
Parke Bancorp, Inc. PKBK Sewell NJ      C 6.10 7.04 15.41%
Preferred Bank PFBC Los Angeles CA      D+ 8.00 11.90 48.75%
SunTrust Banks, Inc. STI Atlanta GA      D 20.50 23.68 15.51%
Undervalued Portfolio         136.45 160.51 17.63%
KBW Bank Index (BKX) BKX 42.56 47.83 12.38%
S&P banking Index (BIX) BIX 137.20 155.09 13.04%
S&P 500 $INX 1,318.43 1,371.97 4.06%
Dow $INDU       12,734.63 13,001.56 2.10%

1Weiss Ratings based on 12/31/2011 data. Green indicates an upgrade; red indicates a downgrade.


The value of the basket of 14 stocks increased by 17.63% in three months which is down 2.24% from the previous two-month result of almost 20%.  The 10-day average volume traded was also down by 38% from the two-month valuation.  While the KBW Bank Index (BKX), a weighted index of 24 geographically diverse stocks representing national money centers and leading regional institutions, gained 12.38% for the same period (down by 4.16% from the two-month mark).  The S&P Banking Index (BIX), a much broader banking index that includes all banks in the Standard & Poor’s, gained 13.04% (down by 1.48% from the last valuation).  For comparison to the general market during this period, the S&P 500 and Dow gained 4.06% and 2.10%, respectively.  Clearly, the banking sector has been one of the top performers during these three months and for all of early 2012.  Although this sector has given back some ground since our last review, the basket of 14 is still outperforming the broader markets.

All 14 bank stocks were up for the three-month period.  Five of the 14 stocks hit their price target in less than three months:  Bank of Commerce Holdings (BOCH) at 103%, Fidelity Southern Corp. (LION) at 101%, MainSource Financial Group (MSFG) at 104%, Preferred Bank (PFBC) at 111% and SunTrust Bank (STI) at 113%.  However, only three, Evans Bancorp, Inc. (EVBN), MainSource Financial Group (MSFG) and Preferred Bank (PFBC), reached their book value (up from two in the previous analysis). Although this means that they are fully valued and are a less desirable buying opportunity, there are plenty of the other values remaining. However, should their prices dip, it could be an opportunity to purchase again.
Some of the best values still remaining are Parke Bancorp (PKBK), Intervest Bancshares (IBCA) and Citigroup (C), which are only at 45%, 73% and 71% of their price targets, respectively.  The current average stock price in the portfolio is at 87% of the group’s aggregate price target (down from 88% last month).  So, there is still plenty of room for price appreciation in the portfolio going forward—even more so, if you consider the group’s aggregate price to book ratio is only at 82%.

Among the top performers for the past three months are Preferred Bank, Inc. (PFBC)—up 48.75% with an average 10-day trading volume of 15,017 shares—and Intervest Bancshares Corp. (IBCA)—up 39.79% with an average 10-day trading volume of 31,328 shares.  While those two names were thinly traded, Bank of America (BAC) was up 12.47% on average 10-day trading volume of 239.2 million shares, Citigroup (C) was up 10.01% on average 10-day trading volume of 42.2 million shares and SunTrust Bank (STI) was up 15.51% on just over 9.46 million shares on average.

However, the percentage gains and trading volumes are down considerably for the larger banks on the list with the likes of Bank of America and Citigroup giving back 19% and 11%, respectively on 193 million less in 10-day average trading volume combined.  This is mainly due to the pull back and profit taking mentioned above for large-cap names.  Still eight of the 14 stocks, mostly small- to medium-cap names, on the list were neutral or higher compared to the last valuation.  The largest gainer in April was Fidelity Southern Corp. (LION) whose share price jumped from $6.65 to $8.19, or a 23% gain, from March 27 to April 24 on nine times the average volume.

Taking overall financial strength into consideration, investment choices narrow somewhat, but the outlook is improving with six of the 14 stocks receiving upgrades by Weiss Ratings in March based on the most recent December 31, 2011 data (one was downgraded).  The highest-rated bank on the list remains KeyCorp at B- (“Good”).  Those with a rating in the C (“Fair”) range are also considered safe and could be interesting to consider. Three were upgraded to this level:  Central Valley Community Bancorp (CVCY), Hanmi Financial Corp. (HAFC) and Intervest Bancshares Corp. (IBCA).  Of course, risk takers might be willing to disregard the issue of financial strength entirely and invest based solely on the potential short-term price upswing.
There are several things to consider when evaluating whether this sector trend is likely to continue.  First, looking at the macroeconomic climate, the domestic economy appears to be stabilizing.  GDP growth has been positive for the last 10 quarters, with the final GDP growth rate at 3% in Q4 2011, up from the first estimate of 2.8%.  The current unemployment rate of 8.2% for March 2012 is down 0.1% from February and down from 8.5% in December 2011, remaining at its lowest level since April 2009.

Challenges continue in the housing market and the European debt crisis is likely to have an effect on the U.S. But low interest rates and the strong dollar should help in the short term. The banking industry should see a boost in lending activity and improved profitability if borrowing costs stay relatively low for consumers and businesses.

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Gavin Magor

Gene Kirsch, senior financial analyst at Weiss Ratings, has more than 20 years of financial industry experience in credit-risk management, commercial lending and loan review analysis within various sized credit unions, finance companies and banks at both the retail and commercial level. He leads the firm's bank and thrift ratings division and developed the methodology for Weiss' credit union ratings.