Regional Bank Stocks Risky Even After Valuations Fall

National City Corp. and Regions Financial Corp. may look like bargains after dropping more than 50 percent this year to the cheapest valuations in two decades. D.A. Davidson & Co.'s Frederic Dickson still won't touch them.

Dickson, who advises 325 financial consultants and helps oversee $25 billion, identifies a value bank stock as one that trades below two times book value. National City and Regions sell for 0.1 and 0.4 times book, respectively, about the lowest since at least 1990, the earliest year for Bloomberg data.

``This is not the time to bottom-fish for banks that are trading near their 52-week lows and have large leveraged balance sheets even though they might appear attractive on an asset value basis,'' said Dickson, 62, chief investment strategist of D.A. Davidson in Lake Oswego, Oregon. ``We don't know what the real asset values are.''

National City, Regions and KeyCorp are among commercial banks that have been stung by soured loans to homeowners and builders, particularly in Florida, home to the fourth-highest foreclosure rate in the country. As market volatility surges and the Standard & Poor's 500 Index heads for its worst month since 1987, Dickson recommends investors stick with top-rated banks that avoided the riskiest types of loans.

The 19-member Standard & Poor's 500 Banks Index has lost half its value in the past year amid the biggest housing crisis since the Great Depression. The index sells for 1 times book value, near the lowest in at least 14 years, as far back as S&P data extend. Book value represents a company's assets minus liabilities.

`Bit of Suspicion'

``You have to view the price-to-book statistic with a little bit of suspicion in this environment because you don't really know what the denominator is,'' said Lawrence Creatura, a fund manager at Clover Capital Management in Rochester, New York, which oversees $2.8 billion. ``It's important to also understand the lending culture.''

Creatura is avoiding National City because of its concentration in Florida and Ohio, even though the company has the lowest price-to-book ratio in the S&P 500 banks group.

About 9 percent of National City's commercial real estate portfolio was in Florida as of June and the company said it expects stress to continue through the middle of next year. Losses are greater than 35 percent on the West Coast of the state, which includes the counties of Lee and Collier. In Lee, one in every 66 housing units is in foreclosure, while the rate in Collier is one in every 161, according to August data from RealtyTrac Inc. One in every 194 Florida homes is in foreclosure.

Shares Plummet

National City shares have tumbled 82 percent this year, the second-biggest drop in the S&P 500 banks group, behind Charlotte, North Carolina-based Wachovia Corp., which is being purchased by Wells Fargo & Co. Regions in Birmingham, Alabama, has slumped 54 percent. Cleveland-based KeyCorp has slid 57 percent.

National City spokeswoman Kristen Baird Adams said the lender isn't ``heavily exposed'' to option adjustable-rate mortgages, unlike some other banks. Option-ARMs were in part responsible for the failure of IndyMac Bancorp and Washington Mutual Inc.

``The company has been reshaped, repositioned,'' Adams said in a phone interview. ``We have a new management team and we think we've done all the right things.''

Regions spokesman Tim Deighton said the company doesn't comment on its stock price. KeyCorp executives weren't available to comment, said spokeswoman Lynne Woodman.

Government Help

As part of a $700 billion bank-rescue plan, the government plans to spend $250 billion taking stakes in U.S. financial institutions, with half going to Wells Fargo, Citigroup Inc., JPMorgan Chase & Co. and six other big lenders. Bank regulators estimated that ``thousands'' of companies would participate. Marshall & Ilsley Corp., Wisconsin's largest bank, said today it's considering the government's offer to inject capital.

``We're continuing to take steps to return stability to the banking system,'' said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California, which oversees about $650 million.

Armbruster said that even though bank stocks may look cheap, he's sticking with ``higher-quality names,'' like Boston- based State Street Corp. State Street, the third-largest U.S. custody bank, said this week that third-quarter profit rose 33 percent as volatile financial markets boosted trading fees. The stock sells for 1.5 times book.

The dividend yield for the S&P 500 Banks Index of 6.1 percent is double its 10-year average. An above-average yield can indicate investors expect dividends may be cut.

Marshall & Ilsley

While National City and Regions slashed dividends this year, Milwaukee-based Marshall & Ilsley increased its payout. With the stock down 26 percent this year, it now yields 6.5 percent, more than twice the 10-year average of 2.8 percent.

The bank's streak of 36 years of increases may come to an end because the 32-cent quarterly payment is equal to 100 percent of third-quarter earnings and analysts are projecting profit of only $1.28 for all of 2009.

Spokeswoman Sara Schmitz didn't return a call for comment yesterday. In a letter to shareholders released today, the bank said it's reviewing the dividend policy ``in light of our projected financial results to make sure that we maintain a strong capital base through this economic down cycle.''

Similar concerns about the ratio of dividends to earnings caused Bank of America Corp. to reduce its payout Oct. 6.

``We know many investors in our stock are quite disappointed,'' Chief Executive Officer Ken Lewis said at the time. ``However, we cannot pay out what we have not earned.''

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Regional Bank Stocks Risky Even After Valuations Fall