June 7, 1999 - Barrons article today about Southern Banks
Bulls Say Southern Banks Will Rise Again
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Brief summary below:
Southern bank shares, once among the biggest beneficiaries of merger speculation, have fared the worst. The Dow Jones industry group of southern banks, for example, which includes regionals like SouthTrust, First Union and Wachovia, is down about 16% from year ago levels, far worse than its peers. Indeed, out of all 95 industry groups, this group ranks a lowly 87th.
Yet as many southern bank shares trade far off their highs, a handful of analysts say the price drops have made the shares of a number of these financial institutions look cheap compared to their peers. And they point to three factors in particular that could lead to strong outperformance by certain stocks in this group over the next 12-18 months.
First, many states below the Mason-Dixon line remain among the fastest growing in the U.S., and stronger-than-average regional growth is likely to continue there for many years to come. That's likely to help propel deposit and loan growth, and earnings as well. Moreover, bank mergers are likely to reaccelerate in the latter part of this year and beginning of 2000 as Y2K concerns fade. That benefits the South with its higher concentration of mid-cap sized banks, they maintain.
The bulls also point to the fact that the executives themselves at many southern banks are increasingly buying shares of their companies, showing some of the strongest insider sentiment among all financial groups.
With rapid population growth expected to continue in states like Texas, Florida and North Carolina and a generally benign regional business environment, "the demographics are still great" for southern banks in general, says Peyton Greene, an analyst at Atlanta-based Sterne, Agee & Leach, an investment boutique that specializes in southeastern banks. Consequently, earnings growth this year is likely to average about 10% for southern banks compared to roughly 5% for all banks, he adds.
And while the market has deducted a significant portion of merger premium from these stocks, there is still plenty of room for consolidation, both between banks in the region and through takeovers by financial companies outside the South, Greene maintains.
Bear Stearns analyst Sean Ryan concurs, pointing to last week's announcement by AmSouth Bancorp to acquire Nashville-based First American as indicative that merger activity is alive and well. The south has the highest concentration of mid-cap banks, which are big enough to have critical mass in their markets but small enough to be digested by larger banks looking for a toehold in their respective areas, he says.
And the one big obstacle to bank mergers--Y2K preparations--will soon be completed by most banks. Analyst R. Harold Schroeder of Keefe, Bruyette & Woods says that Y2K concerns in the industry should lessen in the latter half of the year. That will allow banking executives to focus some of their efforts once again on the cost savings derived from consolidation, and merger activity among southern banks should reaccelerate in the latter part of 1999 and first half of 2000, he predicts.
Among those eagerly snapping up shares of southern banks right now are the folks who run these institutions, says Elizabeth Poisson, an analyst at First Call/Thomson Financial, which tracks insider trading activity. In particular, she singles out Wachovia, SouthTrust, and Hibernia, as well as smaller banks like Premier Bancshares, F&M National, Whitney Holding, and ABC Bancorp, as showing significant insider share accumulation over the last three months or so.
Some of the strongest buying recently -- 11 insiders -- comes at Hibernia, whose rating was upgraded last week to Buy from Accumulate by Bear Stearns analyst Ryan. He says the market has "dramatically overblown" its first quarter's credit quality issues.
That's mainly behind them now, and the bank, whose fortunes are closely tied to the oil and gas industry, should benefit from a turnaround in the energy economy, he says. The bank has the number one share in Louisiana and a growing share in East Texas. With the stock priced so depressed, down about 30% from highs, the takeover potential has increased, asserts Ryan, who has a 22 per share target price for Hibernia.
At Friday's close of 15 1/16, Hibernia's shares trade at less than 14 times Ryan's earnings estimates of $1.13 per share this year and about 11x his $1.40 estimate for 2000, up about 24% from 1999. By comparison, the southern bank price-to-earnings (P/E) ratios average 15x 1999 and about 14x 2000 consensus profit expectations.
Another bank showing heavy insider buying is SouthTrust, a high quality franchise and a consistent earnings grower, says Sterne, Agee analyst Greene. At a time when most banks are struggling to grow traditional revenues, SouthTrust, whose branches stretch across much of the South, is accelerating earnings and showing an impressive ability to grow loans internally, he says.
SouthTrust shares, down about 14% from highs, trade at 15x 1999 consensus earnings estimates of $2.55 per share, up 13% from 1998, which, in turn, was up about 10% from 1997. The stock trades at 13.6x 2000 estimates of $2.84, up 11% from 1999. Both those P/Es are in line with the group, but SouthTrust earnings growth is higher and more consistent than many of its peers.
Greene also likes Premier Bancshares, a small-cap Georgia bank expected to produce strong earnings growth over the next couple of years. At Premier, which Greene rates Accumulate, some ten insiders were steadily acquiring shares in the first quarter, according to First Call/Thomson Financial. Premier stock, also down about 30% from highs, trades at 18.6x First Call consensus earnings estimates of $1.10 per share in 1999, a discount to its expected 20% earnings growth this year.
Right now, many southern banks don't get the time of day from Wall Street. But with strong earnings growth and more consolidations ahead, investors may soon give their portfolios more of a southern accent.
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