Tags: Bank | Stocks | Small

WSJ: Thinking ‘Small’ Can Pay Off in Bank Stocks

Wednesday, 04 Jan 2012 11:15 AM

By Michael Kling

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Stocks of smaller banks will be an opportunity for bargain hunters in 2012. Smaller banks don't face the tough regulatory scrutiny of mega-banks and are better able to increase profits, notes Jack Hough, an editor at SmartMoney.com.

New financial regulations have changed the rules of the game for banks. Regulators are keeping a close watch on banks, especially large banks.

Some say too close.

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The world's 29 mega-banks, including eight based in the United States, must hold larger capital cushions, Hough writes in an article for The Wall Street Journal. Because they can't lend or invest those reserves, their ability to increase profits is more restricted.

Regulators used to think larger banks were safer because of their greater diversification, so they were easier on them than smaller banks, he reports.

Now, regulators' thinking has reversed.

As for economies of scale, that's largely a myth, according to the article. Large branch networks, once needed to attract business, are now a burdensome expense.

Another problem banks face is that demand for loans is low, although customers are putting more funds into CDs and savings accounts.

Keefe, Bruyette & Woods, an investment bank specializing in the financial sector, predicts that Bank of Marin Bancorp, Bryn Mawr Bank, Ban of Marin Bancorp, and CVB Financial in Ontario will be especially profitable this year, the article notes.

For dividends, Columbia Banking System, Hermitage, People's United Financial as well as CVB Financial are good bets.

ETF investors may consider PowerShares KBW Regional Banking Portfolio or SPDR S&P Regional Banking ETF. Also, FBR Small Cap Financial Investor, an actively managed mutually fund posted a healthy 6 percent return last year.

Bank stocks may increase 20 to 25 percent this year, predict RBC Capital analysts.

Improving credit quality, more lending, and capital generation will normalize earnings at some point in late 2013, the researchers predict, according to an article posted on thestreet.com.

"Assuming that interest rates remain low deep into 2013 and the industry's total loan growth averages 4-6 percent, return of capital strategies will surface as critically important in driving bank stock valuations higher, in our opinion," states the RBC report.

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