(01/09/12) 3 Bank Stocks With Big Upside

Many regional and local banks are starting to do better as the economy expands. Here are three long-term winners, writes MoneyShow.com senior editor Igor Greenwald.

Two months ago I called bank stocks "lepers," harping on the market’s lack of faith in the financial health of Morgan Stanley (MS), Bank of America (BAC), Citigroup (C), and other money-center banks trading at vast discounts to alleged book value.

Lower lows followed shortly, but for the last six weeks much of the banking sector has been rebounding. The charts of Wells Fargo (WFC), US Bancorp (USB), and even JP Morgan (JPM) are resurgent, making Citi and BofA look more like laggards than canaries in a coalmine.

Risks of fallout from a potential European collapse remain, of course, and for the largest banks they’re compounded by questions about the business model, scope for growth, and the commitment of senior managers to the company’s long-term prosperity, as distinct from their personal bank account balance.

But there are reasons to believe the latest reprieve is more than just a trading bounce, starting with the performance of regional bank stocks as well as small-cap local plays, some of which are notching record highs.

Many of these banks are seeing diminishing credit losses, rising deposits, and steady interest margins. Some of them are already paying dividends at levels that would be prized in more popular industries.

Several of the top performers also saw heavy insider buying last summer and fall, while investors were panicking. And the entire sector is poised to benefit from the surprising strength shown by the US economy in the face of the overseas slowdown.

Here are several bank stocks that look particularly attractive.

Fifth Third Bank (FITB)
The Cincinnati, Ohio-based regional giant is a major player in both the Midwest and Southeast, two regions benefiting from a recovery in US manufacturing. Credit losses are way down year-over-year, boosting profits and providing plenty of room for the bank to increase its 2.4% dividend yield.

The stock is up 37% since October 3, but still down 13% since last Valentine’s Day. With shares still trading just below book value, there’s much more upside potential, based on recent business trends.

“We've seen our bread-and-butter commercial-industrial lending to middle markets really pick up,” the CEO said last week. "...We expect that momentum to continue into 2012. There's money to be lent and [borrowers] are looking for money.”

First Niagara Financial Group (FNFG)
First Niagara’s stock remains down 40% from last year’s peak, weighed down by the costly fundraising undertaken to acquire 195 HSBC (HBC) branches in and around Buffalo, NY. The stock’s rich dividend has been cut in half, though the 3.5% current yield still doesn’t look too shabby.

The bank has a strong management team, as reflected in robust past returns and the recent acceleration of lending and deposits, all with minimal effect on the strong credit profile. But the slump following the HSBC deal has left the stock trading 34% below book value, discount that should narrow in the coming months.

Jefferies analyst Casey Haire started coverage of First Niagara last month as a Buy with a $10 price target. “There is no bank within our...coverage universe that comes close to FNFG's high-teens tangible return-on-equity profile," he noted. The stock is trading at nine times its estimated 2012 earnings.

Eagle Bancorp (EGBN)
This $300 million Washington, DC-area business lender boasts a high-powered management team, strong business fundamentals, and enthusiastic insider buying. A key director spent nearly $500,000 just before Christmas on share purchases 7% below the current price, which has reclaimed levels last seen in 2007.

Despite the gains, the stock still trades at just 11 times estimated 2012 earnings. The bank is growing briskly, adding branches in D.C. and boosting revenue 30% year-over-year.