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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Housing Recovery Can't Save the Regional Banks

Stocks in this article: STI BBT KEY WFC USB

That isn't good for the banks' bottom lines. According to a study by Jefferies, of 24 regional banks, eight have recently reported a decrease in NIM that was north of 10 basis points (or one tenth of a percent). That is considered a large decline in the industry. This decline is leading management teams at the regional banks to reduce their earnings outlooks, and that's driving these banks' stocks lower.

In the most recent case, SunTrust (STI), reported earnings this morning that included an 11 basis point decline in net interest margin to 3.38%.

While the NIM pressure is certainly a key driver of performance in the group, slowing loan growth is also an issue. Even with low interest rates, businesses are less interested in taking out loans to expand, because of the significant uncertainty surrounding the future of the tax code, health care costs and the fiscal cliff.

It's going to a tough operating environment for the group heading into 2013. That said, there continue to be some bright spots. For instance, Keycorp (KEY) was a standout when it released third-quarter earnings that were characterized by an improving net interest margin and impressive loan growth (up 5.1%) for the fifth consecutive quarter.

The company also has a restructuring plan underway that management reiterated would lead to $150 million to $200 million in cost savings. What's more, its shares trade at a significant discount to tangible book value, making them an attractive addition to a portfolio.

Two of the higher quality regional bank stocks that are also worth looking at are Wells Fargo (WFC) and U.S. Bancorp (USB). Both of these banks have a history of strong loan growth and solid capital positions. They have consistently returned capital to their shareholders and offer some of the best return on equity in the industry.

These two stocks certainly aren't cheap and trade at a premium because of their high quality. But, if you have a longer investment horizon, the return on equity is a solid reason to consider investing in them, even if you don't buy them at the best price.

-- Written by Lindsey Bell in New York.

>To follow the writer on Twitter, go to Lindsey Bell.

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