Four Potential Regional Bank Takeout Targets - TheStreet

Four Potential Regional Bank Takeout Targets

Speculation about regional bank consolidation is heating up. Here are four names that could end up in play.
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NEW YORK (

TheStreet

) -- Speculation about regional bank consolidation is heating up.

The financial crisis provided an ample environment for healthier institutions to snap up failed banks on the cheap with the

Federal Deposit Insurance Corp.

backstopping much of the toxic assets. But that trend is likely to fade as competition increases between willing buyers, enabling the government to drive a harder bargain.

Analysts say that traditional

bank M&A

, where one bank purchases or merges with another institution for a premium (whether that's valued by stock price or deposits) is likely to pick up in 2011 and then play out over the two years that follow.

Credit Suisse analyst Craig Siegenthaler posits that stronger regulation and weaker loan growth in certain geographies and lending segments in the coming years will force some banks to "find more creative methods" of growing earnings and deploying capital. At the same time, other bank management teams and boards may experience "fatigue" and become willing sellers, given the events of the last three years, he says.

While the largest banks including

Bank of America

(BAC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

and

Citigroup

(C) - Get Report

may be hindered from making deals by their size, those banks labeled as "super regionals," including

U.S. Bancorp

(USB) - Get Report

,

PNC Financial Services

(PNC) - Get Report

and

BB&T

(BBT) - Get Report

, could lead a next wave of consolidation beginning as soon as next year.

"We believe the super regional

banks will start to shift M&A focus upstream towards the mid-cap

banks, away from the competitive FDIC-assisted transaction market," Siegenthaler writes Thursday. "While we place a lower probability of a merger between a super regional (or foreign bank) and a mid cap in 2010, we expect the probability of such a merger will increase in '11 and '12 with improved capital, regulatory visibility and assign the highest probability of a takeout to banks with weak loan growth."

Here's a look at Siegenthaler's top potential targets: Four regional banks with depressed valuations that he believes are ripe for consolidation in the next few years. The metrics listed for each are based on the June 14 closing prices for their respective stocks.

>>Video: The Best Regional Bank Stocks

Regions Financial:

Headquarters: Birmingham, Ala.

Assets: $137 billion

Price to Tangible Book Value: 1.1 times versus an average of 1.74 times for the 35 U.S. banks covered by Credit Suisse

Core Deposit Premium: 10% vs. an average of 22.7% for the 35 U.S. banks covered by Credit Suisse

Stock Performance:

Regions'

(RF) - Get Report

share price was up 35% year to date based on Wednesday's close at $7.16. It has a current forward price-to-earnings multiple of 28.2 times the average estimate for its 2011 earnings and 9.2 times 2012 earnings estimates, according to

SNL Financial

. Still the stock is down 23% from its 52-week-high on Apr. 21, one day after it reported a first-quarter loss of 21 cents a share that beat analysts' estimates by 22%, according to

Thomson Reuters

.

Wall Street sentiment on Regions is non-commital at the moment. 17 of the 22 analysts covering the company rate it as a hold. Only two say buy, and the remaining three rate it at underperform. The current median 12-month price target on the stock is $8.50, according to

Thomson Reuters

data.

KeyCorp:

Headquarters: Cleveland

Assets: $95 billion

Price/Tangible Book Value: 1 times

Core Deposit Premium: 13%

Stock Performance:

KeyCorp's

(KEY) - Get Report

share price has risen 52% year to date based on Wednesday's close of $8.39. It has a current forward price-to-earnings multiple of 23.1 times the average estimate for its 2011 earnings and 9.7 times 2012 earnings estimates, according to

SNL Financial

. Still the stock is down 15% from its 52-week-high on Apr. 21, one day after KeyCorp reported first-quarter loss of 11 cents a share, beating analysts' estimates by 63%, according to

Thomson Reuters

.

Key has long been mentioned as a possible takeout candidate, with the most popular rumored combination being that it would merge with its cross-state rival

Fifth Third

(FITB) - Get Report

(particularly since National City, also formerly of Cleveland, was acquired by

PNC Financial Services

(PNC) - Get Report

in late 2008). Siegenthaler mentions a hookup between Key and Fifth Third as a "top idea" for consolidation in the note.

Synovus Financial:

Headquarters: Columbus, Ga.

Assets: $32 billion

Price/Tangible Book Value: 0.8 times

Core Deposit Premium: 10%

Stock Performance:

Synovus'

(SNV) - Get Report

share price has risen 39% year to date based on Wednesday's close of $2.84. It has a current forward price-to-earnings multiple of 9.2 times the average estimate for its 2012 earnings, according to

SNL Financial

(A forward P/E based on 2011 estimates is not available because analysts expect Synovus to post a loss).The stock is down 38% from its 52-week-high on Sept. 16, 2009. For its latest quarter, Synovus posted a loss of 56 cents a share, 14% worse than the average analyst estimate, according to

Thomson Reuters

.

Despite the continued red ink, Siegenthaler upgraded Synovus to neutral from underperform on Wednesday, saying he believes the stock's downside is "limited" going forward. He notes the stock has underperformed the industry by 8% and 11% over the last month and three months respectively. The bank completed a successful $1.1 billion capital raise last month which Siegenthaler views as a positive.

"The capital raise reduced our downside risk limit for the stock as our estimate of continued elevated credit expenses could now be offset with fresh capital, and the drop in the stock post the raise has driven more upside," he writes. "In our view, both the potential upside and downside levels have improved forming a stronger risk-adjusted proposition for SNV

and driving our rating upgrade."

Sterling Bancshares:

Headquarters: Houston

Assets: $5 billion

Price/Tangible Book Value: 1.2 times

Core Deposit Premium: 15%

Stock Performance:

Sterling's

(SBIB)

share price has remained flat on a year to date basis. It has a current forward price-to-earnings multiple of 24.8 times the average estimate for its 2011 earnings and 13.4 times 2012 earnings estimates, according to

SNL Financial

. The stock is down 70% from its 52-week-high on Aug. 4, 2009. For its latest quarter, Sterling managed to post breakeven results, beating the average analyst's estimate of a loss of 7 cents a share, according to

Thomson Reuters

.

More on Regional Banks Two Questions on the Future of Banking

The current view on Wall Street about Sterling is mildly enthusiastic. Of the 15 analysts covering the company, five rate it as a strong buy, one is at buy, and the remaining nine are at the equivalent of hold (including Seigenthaler, who rates the stock at neutral). The current median 12-month price target on the stock is $6, implying almost 18% appreciation from current levels.

--Written by Laurie Kulikowski in New York