Bank Stock Portfolio: Up 19.87% in Two Months
Weiss Ratings Upgrades Six

by Gene Kirsch, Senior Banking Analyst | March 28, 2012

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

In January, we selected 14 undervalued bank stocks that represented good investment value. This 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

As of January 26, one of our selections, KeyCorp (KEY) traded at $7.88 per share, with a book value of $9.10 on September 30, reflecting a ratio of 87%. The bank was trading at a 19% discount from its 52-week high of $9.77 reached on February 15, 2011. 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%. The assumptions to arrive at the 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. KeyCorp, the most financially healthy bank in the group, had one of the lowest percentage increases in stock price over the period, at 6.09%.    

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 two-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 3/27/2012 % Change from 1/26/12 to 3/27/12
1st Constitution Bancorp FCCY Cranbury NJ      C+
7.30
8.08
10.68%
Bank of America Corporation BAC Charlotte NC      D+
7.30
9.60
31.51%
Bank of Commerce Holdings BOCH Redding CA      C
3.73
4.36
16.89%
Central Valley Community Bancorp CVCY Fresno CA      C-
6.13
6.80
10.93%
Citigroup Inc. C New York NY      C
30.38
36.78
21.07%
Evans Bancorp, Inc. EVBN Hamburg NY      C-
12.46
14.20
13.96%
Fidelity Southern Corporation LION Atlanta GA      D
6.56
6.65
1.34%
Hanmi Financial Corporation HAFC Los Angeles CA      C-
8.10
10.18
25.68%
Intervest Bancshares Corporation IBCA New York NY      C-
2.84
3.95
39.08%
KeyCorp KEY Cleveland OH      B-
7.88
8.36
6.09%
MainSource Financial Group, Inc. MSFG Greensburg IN      C
9.17
11.71
27.70%
Parke Bancorp, Inc. PKBK Sewell NJ      C
6.10
7.04
15.41%
Preferred Bank PFBC Los Angeles CA      D+
8.00
11.96
49.50%
SunTrust Banks, Inc. STI Atlanta GA      D
20.50
23.90
16.59%
Undervalued Portfolio        
136.45
163.57
19.87%
KBW Bank Index (BKX) BKX
42.56
49.60
16.54%
S&P banking Index (BIX) BIX
137.20
157.12
14.52%
S&P 500 $INX
1,318.43
1,412.52
7.14%
Dow $INDU      
12,734.63
13,197.73
3.64%

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

The value of the basket of 14 stocks increased 19.87% in the two months with a 45% increase in 10-day average volume traded. While the KBW Bank Index (BKX), a weighted index of 24 geographically diverse stocks representing national money centers and leading regional institutions, gained 16.54% for the same period. The S&P Banking Index (BIX), a much broader banking index that includes all banks in the Standard & Poor’s, gained 14.52%. For comparative purposes, the general market for both the S&P 500 and Dow gained 7.14% and 3.64%, respectively. Clearly, the banking sector has been one of the top performers during the two months and for all of early 2012.

All 14 bank stocks were up for the two-month period with Intervest Bancshares Corp. as the worst performer — up only 3.95% on average 10-day volume of 30,491 shares. Five of the 14 stocks hit their price target we set in just two months: Bank of America (BAC) at 109%, Bank of Commerce Holdings (BOCH) at 104%, MainSource Financial Group (MSFG) at 104%, Preferred Bank (PFBC) at 112% and SunTrust Bank (STI) at 114%. However, only two bank stocks — MainSource Financial Group (MSFG) and Preferred Bank (PFBC) — reached their tangible book value. Some of the best values still remaining are Parke Bancorp (PKBK), Intervest Bancshares (IBCA) and Citigroup (C), which are only at 45%, 72% and 78% of their price targets, respectively. The current average stock price in the portfolio is at 88% of the group’s aggregate price target (up from 81%, 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 83%.  

Among the top performers for the past two months are Preferred Bank, Inc. (PKBK) — up 49.50% with an average 10-day trading volume of 27,816 shares — and Intervest Bancshares Corp. (IBCA) — up 39.08% with average 10-day trading volume of 30,491 shares. While those two names were thinly traded, Bank of America (BAC) was up 31.51% on average 10-day trading volume of 422.1 million shares, Citigroup (C) up 21.07% on average 10-day trading volume of 56.8 million shares and SunTrust Bank (STI) was up 16.59% on just over 11.4 million shares on average.

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 based on the most recent December 31, 2011 data (1 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. 

To evaluate whether this trend is likely to continue several things should be considered. First, looking at the macroeconomic climate, the domestic economy appears to be stabilizing. GDP growth has been positive for the last ten quarters, with the latest GDP growth rate at 3.0% in Q4 2011, up from the first estimate of 2.8%. The current unemployment rate of 8.3% for February 2012, unchanged from January and down from 8.5% in December 2011, is at its lowest level since April 2009. 

Continued challenges remain 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.

To review bank performance, see Weiss Ratings’ complete lists of the strongest and weakest banks at www.weissratings.com/banklists.

 

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.