How a Tweak to the Law Just Made This Bank Stock a Steal
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When Congress passed the Dodd-Frank Reform Act earlier this year, a lot of skeptics thought it was like lighting the fuse for the next big blowup.
That just isn’t the case. Instead, it’s making one of my favorite investing sectors even more lucrative for you: regional banks.
There is no one on the planet who keeps a closer eye on bankers than I do. After all, I have a lot of my own money – and more importantly my wife’s “I will kill you in your sleep if you lose my money” IRA account – invested in bank stocks.
If I thought for a second that the Dodd-Frank Reform Act would hurt the banking sector, I’d run for the hills.
But it isn’t, and knowing how it works could be hugely profitable for you. In fact, I’ve already found a banking stock primed to surge now that the new law is in place…
Why the Dodd-Frank Reform Act Is a Great Opportunity
Look, I understand where the skeptics are coming from. Given enough rope, bankers will inevitably hang themselves in search of an extra percentage point of return.
But reforming Dodd-Frank left them almost no rope at all and is simply not a sign of impending doom for the financial system.
Most of the new law was aimed at making life a little easier for community banks to survive.
Rather than unleashing Wall Street’s banking behemoths on the world, it merely turned Dodd-Frank’s 800-pound gorilla into a 700-pound monster. Most of the reforms had to do with technical issues and left the restriction on derivatives and trading practice intact.
The big change from the Dodd-Frank Reform Act was raising the “Too Big to Fail” threshold from $50 billion in assets to $250 billion. Banks above the limit face much tighter restrictions and making acquisitions for these banks was pretty much impossible.
Raising the barrier opened up merger and acquisition (M&A) possibilities for the mid-to-large banks and widened their potential takeover target pool substantially.
In fact, the ink was barely dry on the on the president’s desk when the first significant regional bank deal was done.
The bank behind the deal has made me a lot of money in the past, and is one I’m always keeping my eye on.
And thanks to the new law’s fairer treatment of regional banks, it’s an easy buy right now…
This Regional Banking Stock Just Became a Buying Opportunity
Cincinnati-based Fifth Third Bancorp (Nasdaq: FITB) announced it would spend $4.6 billion in cash and stock to muscle its way into Chicago.
FITB is taking Chicago by storm by buying MB Financial Inc. (Nasdaq: MBFI) and its 86 Chicago-area branches and $20 billion of assets. Fifth Third wants a more prominent presence in the lucrative Chicago commercial lending market, and buying its way in is a lot quicker than growing a presence over time.
I have been a big fan of Fifth Third for years. I owned the stock in the aftermath of the credit crisis and in true Melvin fashion sold too soon with just a triple and watched it more than double again.
However, even as the share price has risen, earnings have more than kept pace. Earnings have increased five-fold since the end of the credit crisis, and in spite of the stock’s performance, the stock is still cheap at current prices.
Fifth Third has a long runway for potential M&A activity as well.
The MB Financial deal takes it up to about $160 billion in assets, so it can do about four or five deals before it once again runs into the “Too Big to Fail” limitations under the new rules. I can easily see it making a few smart deals to grow across a broader swath of the Midwest and grow earnings at an above-average rate for the next few years.
The bank is in fantastic financial shape as well.
In the Fed’s recent stress test, Fifth Third did very well under the harsh hypothetical scenario laid out by the Federal Reserve. The bank passed with flying colors under conditions that simulated an economic and financial markets situation every bit as bad as 2008.
Management has proven themselves to be quality loan underwriters, and non-performing assets at Fifth Third are just .45% of total assets. The bank has plenty of capital on hand, and its equity to asset ratio of 12.08 is better than its peer group.
Because of Fifth Third’s financial strength, the Fed has approved its capital plans and will allow it to increase its distributions to shareholders. In spite of the fact that Fifth Third just raised its dividend by 13%, the new capital plans call for an additional 33% in the next year. On top of that, the bank will increase its stock buybacks by 42%.
While there are a lot of good things going on at Fifth Third, you’re getting a steal on the stock’s share price. The stock currently trades at just 9.28 times earnings. That’s well below the average per earnings (P/E) multiple of similar banks in terms of size and region which presently fetch 21 times earnings.
The stock has to double just to be valued the same as its peers, even those with less potential and weaker balance sheets!
And our proprietary stock rating tool agrees this stock is a perfect buy. FITB shares have a Money Morning Stock VQScore™ of 4, our highest rating.
It is not often you can buy a well-run, profitable bank that is in excellent financial shape at a single-digit P/E ratio.
When you can, history suggests that is has been wildly profitable. That rare opportunity is available today in shares of Fifth Third Bancorp and investors would be wise to heed history’s message.
