Five Fetching Bank Stocks

The deepening housing crisis has opened up buying opportunities among bank stocks.

An analysis by TheStreet.com Ratings shows that five bank stocks -- including giants Bank of America(BAC Quote) and Wachovia(WB Quote) -- could be worth buying, on the basis of the stocks' reasonable valuations and the companies' strong, sustainable dividend policies.

Bank stocks can still be risky short-term plays, since we probably haven't seen the worst of the housing crisis. Some tempting buys are out there, however, among stocks that are trading well off their highs and paying out alluring dividends.

To find the real gems within the longer list of cheap, high-dividend-yield bank stocks, we filtered the list to highlight value.

The following fundamental criteria help limit risks associated with asset quality and earnings:

• Dividend yield of at least 5%. A high dividend yield provides some downside protection if the stock falls. Dividends are often a key component in making a bank stock attractive to investors. In a slow-growth industry with often predictable earnings, a generous dividend can attract conservatively minded investors. Normally, seeking a yield of 5% would be too greedy, but not in this market.

• Price-to-book-value ratio below 2. Another seductive feature of many bank stocks at a time like this is their low price relative to book value. In fact, one of the stocks on the list below is priced at 1.06 times book value.

• Dividend payout ratio below 100%. We excluded bank holding companies whose total dividends paid out during the first half of 2007 exceeded their earnings. This is a bit harsh, as it is not unusual for a bank holding company to reduce excess capital by increasing its dividend, or to have a bad earnings quarter while maintaining a high dividend. Nevertheless, payout ratios of 100% or more increase the risk of a bank cutting its dividend. Companies can't pay dividends exceeding earnings forever.

• Nonperforming assets comprising less than 1% of total assets. Banks with good asset quality may still suffer from the housing downturn, but this group has held up well so far.

Five Bank Picks for the Dividend-Minded

Keep in mind that there are many great banks not on the list.

By excluding those with asset quality problems and with dividend payouts exceeding earnings, our aim was to highlight stocks with limited risk of dividend cuts. As you can see in the Total Return column, all but one of these are down significantly over the past year. Considering how hard several of them have been hit, there may also be strong prospects for price appreciation.

Asset Quality and Earnings

Huntington Bankshares ( HBAN Quote) has the highest dividend yield on the list, at 6.26%. It also has the worst total return over the past year for the group. While the holding company's asset quality is not terrible, problem loans are up significantly from June 2006. The declining asset quality was the main factor in a sharp drop in earnings for the second quarter of 2007, as the company increased its quarterly provision for loan losses by $44 million. Net income for the quarter was $80.5 million, compared with $111.6 million a year ago.