The two statements above are true but that does not necessarily mean the bank is free from European exposure and other risks. They key to investing in sound regional banks is not only about the banks liquidity but the quality of the liquidity.
Low interest rates, weak loan demand and bank regulatory compliance have affected regional bank earnings. A Moody's report dated Dec. 13, 2011, and titled “As U.S. Regional Banks Adapt to a Changing Landscape, Some Take on More Risk,” indicates banks are taking on more risk. The report goes on to say that the new initiatives some regional banks are pursuing to compensate for earnings pressures in their core businesses may be credit negative.
Many Regional Banks are taking on more risk and are not immune to the problems in Europe. The Regional Banks may have indirect exposure to Europe in the following areas:
1) Investment portfolios
2) Commercial and industrial loans which may rely on European sales to satisfy payment
With loan growth anemic, many banks have built large investment portfolios. These portfolios include preferred stocks, bonds and commercial paper of companies with European exposure. Proctor and Gamble and Ford both reported earnings today and additionally blamed Europe for lower fourth-quarter 2011 earnings. P&G went further to lower 2012 forecasts due to the problems in Europe. A decline in asset prices of any investment a bank may own, be it commercial paper or bonds, requires a marked to market adjustment to other comprehensive income unless it is listed as held to maturity.
Investing in sound regional banks is not only about the banks liquidity but the quality of the liquidity. Investment portfolios have become a larger percentage of regional banks assets and investors should consider the portfolio as they would with insurance companies. An analyst should watch the movements of held for maturity and held for sale for clues for large losses and poor investment decisions.
Sterling Bancorp (NYSE:STL) has an example of the portfolio risks regional banks are pursuing to compensate for earning pressure. In its latest 10-Q, it lists a $6 million investment in a Goldman Sachs (GS) Preferred Trust. As of Sept. 30, 2011, the note had an unrealized loss of $500,000 or a 9% decline in an investment which is considered Tier One Capital.
Commercial and industrial loans have become a larger percentage of loans in regional banks and how some banks are diversifying their earnings. C&I are loans which are made to business either direct or indirect (syndicated loan portions). These are mainly to middle market companies and its business may have a large exposure to Europe. A recent example is Alere Inc. (NYSE:ALR) which just completed a $250 million term-loan syndication which many regional banks participated in this loan. In early January, at a JP Morgan HealthCare Conference, Chairman Ron Zwanziger said that Alere was certainly affected by Europe in November and December but did not go into detail. The company lowered earnings guidance by 10% and the stock fell 7% that day. Certainly, the $250 million term-loan declined in value as well.
Regional banks are not immune to the problems in Europe and have been taking on greater risks than in the past. Investment portfolios have also become larger than historical averages and investors should consider their quaility and volatility for valuation. The new regional bank model has greater capital market risk. This risk is not reflected in their stock price as the KRW Regional Bank Index is trading near a 52-week high.[i][/i]
About the author:
• Realized average annualized returns on self managed IRA account of 14% from January 2004 to December 2012 (total return 150+).
Save on home energy bills at www.napower.com/224201