TheStreet.com Ratings
Two Bargains in Banking Stocks
03/04/08 - 05:39 AM EST
We may be approaching the bottom of the market for financials, as mortgage players such as IndyMac Bank IMB expect problem loans to peak in late 2008. While it may be a bit early, this is a good time to start looking for bargain bank stocks that could produce stellar returns for patient investors once the recovery begins. Back in September, TheStreet.com Ratings looked at the bank and S&L stock components of the S&P 500, 400 MidCap and 600 SmallCap indices, and narrowed the group down to five that were attractive based on several criteria, including a price-to-book ratio below two. On Friday we gave an update on the performance of the group, with three of our picks tumbling and two bringing in stellar results.
Filtering Out Candidates
The Treasury Department and the largest players in domestic mortgage servicing have been addressing the problems of subprime borrowers facing unaffordable rate resets, through the Hope Now Alliance and Project LifeLine. With the "R" word being bandied about, the Federal Reserve has made aggressive rate cuts and is likely to do more. Starting again with the three S&P Financial Indexes, here are criteria for filtering out potential candidates for bank and S&L holding company stocks in this market:- Price-to-book ratio below one.
- Nonperforming assets comprising less than 1% of total assets.
- Loan loss reserves covering at least 100% of nonperforming loans.
- A ratio of nonperforming loans to core capital and reserves of less than 10%.
- Positive net income for 2007.
- 2007 Dividend payout ratio below 100%.
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