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Regional Bank Stocks Upgraded as Market Tanks

NEW YORK (TheStreet) -- The painful decline in bank stocks is opening up some opportunities for investors to pick up shares of strong regional banks whose stock valuations may previously have been too rich for consideration.

Following an increase of 35% during 2012, preceded by a 30% gain during 2011, the KBW Bank Index (I:BKX) has given up 5.4% this year, including Monday's decline of 2.7%. That's not such a large decline, following such a strong recovery over the previous two years, but it certainly is a significant change in direction. Meanwhile, the KBW Regional Bank Index (KRX) was down 3.8% on Tuesday, and has declined 9% this year, following a 44% rise during 2013.

The forward price-to-earnings multiple, based on 2015 earnings estimates for small and mid-cap bank stocks, has fallen to 13.5 from 15.5 over the past month, according to KBW analyst Jefferson Harralson. Even at this lower level, the up-and-coming regional banks trade for much higher valuations than the largest U.S. banks, many of which also look ripe after the recent brutal market action.

But for growth investors, the smaller names are where the action is.

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KBW's analyst team in a note to clients on Monday listed seven "outperform" rated small and mid-cap bank stocks "to buy on this pullback:"

Shares of MB Financial (MBFI) of Chicago closed at $27.02 Monday, down 16% this year, following a 65% return during 2013. The shares trade for 12.2 times the consensus 2015 earnings estimate of $2.22 a share, among analysts polled by Thomson Reuters. The company has a deal in place to acquire Taylor Capital Group (TAYC) of Rosemont, Ill., which is expected to close during the first half of 2014. "Even though MBFI/TAYC merger doesn't close for a few more months (i.e., the catalyst), we believe it has no business being this cheap at just 11.5x our 15E vs KRX at 13.5x," KBW analyst Christopher McGratty wrote in the firm's note on Monday. McGratty is out in front of the consensus, estimating MBFI will earn $2.35 a share in 2015. His price target for the shares is $34.00.

BankUnited (BKU) of Miami Lakes, Fla., closed at $30.45 Monday, down 7% this year, following a 38% return during 2013. The stock trades for 14.4 times the consensus 2015 EPS estimate of $2.12. KBW analyst Brady Gailey estimates BankUnited will earn $2.25 a share in 2015. "We believe its valuation at 13.5x 2015E is too inexpensive relative to its impressive organic growth. In our opinion, as investors focus more on 2015, which we forecast to be a breakout year for BKU with 25% EPS growth, BKU shares should shift toward a higher 16-17x earnings multiple," Gailey wrote. His price target for BankUnited is $38.00.

Shares of CVB Financial (CVBF) of Ontario, Calif., closed at $14.36 Monday, for a year-to-date decline of 16%, following last year's 69% return. The shares trade for 14.5 times the consensus 2015 EPS estimate of 99 cents. KBW analyst Juliana Balicka in the firm's note cited CVBF's "high profitability," loan growth and potential for the deployment of excess capital as catalysts for the shares. "We think they are well positioned to be a buyer on the near term, as buyer competitors are either busy integrating large acquisitions or are private," she wrote. Her price target for the shares is $18.00.

Banner Corp. (BANR) of Walla Walla, Wash., closed at $35.64 Monday, down 20% this year ,following a 48% return during 2013. The shares trade for 14.1 times the consensus 2015 EPS estimate of $2.52. KBW analyst Jacquelynne Chimera wrote that "trapped capital deployment would likely be nicely accretive given the 12.23% [tangible common equity] ratio." The analyst also noted the bank's strong fourth-quarter loan growth and added that "management-whom we view as quite conservative-seemed increasingly positive." Chimera's price target for Banner's shares is $44.00.

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