With banking stocks back in favor, smaller banks are learning they cannot count on investors to buy their stock just because it is cheap.
Shares of banking companies with more than $1.5 billion of assets have gained 13.6% this year through Sept. 18, said Marni Pont O'Doherty of Keefe, Bruyette & Woods Inc., and smaller banks have risen only 1%. "Smaller caps used to move as a block even a couple of years ago," she said. "Now some stocks are blowing the lights out, but the rising tide might not lift all the boats."
Ms. Pont O'Doherty, initiating coverage of a $583 million-asset Texas banking company with an "outperform" rating, said the smaller banks must diversify their businesses if they are to keep pace with their larger brethren.
Summit Bancshares of Fort Worth, Ms. Pont O'Doherty said, is an example of the kind of company she likes best. Its shares suffered during the summer after it failed to meet analysts' second-quarter consensus earnings estimate due to a rise in nonperforming assets, she wrote, but "it would appear as if the credit should not negatively impact future earnings."
Shares of Summit declined 16.9% from June 15 to Aug. 31 but have recovered strongly since and closed Tuesday at $17.625, up 12.5 cents, or 0.71%. Ms. Pont O'Doherty's target price for the stock is $20.
Other favorites are Southwest Bancorp. of Texas, a $3.3 billion-asset Houston banking company whose shares closed at $33.9375 on Monday, up 43.75 cents, or 1.31%, and Texas Regional Bancshares, a $2.3 billion-asset company in McAllen, up 37.5 cents, or 1.33%, to $28.50. Ms. O'Doherty gave both an "outperform" rating.
Eric E. Rothmann, who covers regional banks for First Security Van Kasper in San Francisco, wrote in an Aug. 23 report that high-quality regional banking companies are likely to continue to do well but that "there is lower expectation for the performance of community banks as their revenue streams are less fee-oriented.
"The easy money is out of the stocks," he said, meaning that smaller banks cannot expect to attract investors simply by having stock valuations that look like buying opportunities. "People buy on a selective basis," he said.
Bryce W. Rowe of Anderson & Strudwick Inc., a Richmond, Va.-based investment firm, wrote in his quarterly community bank monitor, issued on Tuesday, that he expects to see investors focusing more on stocks with lower price-earning ratios, like those of community banks. But he agreed that not all will benefit equally. He has a lukewarm "accumulate" rating on four of the 10 banks he covers.
He named Independent Community Bankshares, a $260 million-asset company in Middleburg, Va., and Southern Financial, a $427 million-asset company in Warrenton, Va., as his favorites, rating them "buy" and "strong buy," respectively. These are banking companies with growing fee income and good management, he said, which differentiates them from their peers. Independent Community Bankshares, for example, plans to increase noninterest income from 30% of its revenues this year to 50% in 2001.
"Management is not generally a weak point among the banks we rated 'accumulate,' " he said, "but it is definitely a strong point among those we rated with 'buy' and 'strong buy.' "