In the aftermath of the Federal Reserve stress-testing the nation’s banks, most investors likely have an understanding of where the biggest banks currently stand. However, while America’s bulge-bracket financial institutions have been hampered by issues ranging from legal settlements to massive trading losses, there are a number of smaller banks that are doing very well.
Regional banks, which offer financial services to a particular region of the United States, may be a great place to look for investors interested in well-run, dividend-paying banks. In fact, there happen to be two regional banks whose stress-test results were appreciably better than their bulge-bracket peers. You may not know much about KeyCorp (NYSE:KEY) or Fifth Third Bancorp (NASDAQ:FITB), but if you’re interested in investing in the financial sector, you’d do yourself a service to dig deeper into these regional banks.
Passing with flying colors
The stressful circumstances of the recently completed stress test included unemployment rate reaching 12.1%, home prices plummeting nearly 21%, severe recession in the U.S., Europe and Japan leading to about 50% fall in equity prices, along with the U.S. GDP falling 6.1%. In all, the group of banks included in the Fed’s exercise would lose $462 billion in a downturn incorporating all of these factors. The Fed had set the Tier I common capital ratio, which measures a bank’s high-quality capital as a share of risk-weighted assets, at 5% or above to clear the current stress test.
While America’s largest financial institutions showed Tier 1 common ratios between 5% and 6%, KeyCorp (NYSE:KEY) came in with a Tier 1 ratio of 8%. All told, the bank has projected losses of about $2.4 billion should the dire circumstances posed by the stress test come to fruition. Fifth Third fared even better, with a Tier 1 common ratio of 8.6%. Furthermore, Fifth Third Bancorp (NASDAQ:FITB) would only lose $300 million under the Fed’s testing scenario.
KeyCorp (NYSE:KEY) operates as a holding company for KeyBank National Association that provides various banking services in the United States. KeyCorp (NYSE:KEY) has a compelling valuation, trading for only 10 times trailing earnings. Furthermore, the stock trades for a price-to-book ratio of only 0.88. The company raised its dividend by 67% in 2012, and currently yields 2%. KeyCorp (NYSE:KEY) reported full-year 2012 total revenues increased nearly 4%, including a 10% increase in total revenues in the fourth quarter year over year.
Fifth Third Bancorp (NASDAQ:FITB) is a $14 billion regional bank that trades for only 10 times its trailing earnings per share and offers a dividend yield near 2.5%. In January, Fifth Third Bancorp (NASDAQ:FITB) posted fourth-quarter earnings of $.43 per diluted share, up 30% from the same quarter the year prior. In addition, the bank reported full-year earnings of $1.5 billion, or $1.66 per diluted share, up 41% compared with 2011’s results of $1.1 billion, or $1.18 per diluted share.