Why KeyCorp and BankUnited Are Better Investments Than Stocks of Big Banks

The banking sector is wracked by upheaval, and mainstream banks no longer seem like safe havens. Aggressive lending practices coupled with the commodity crash led by oil prices have made the big banks risky propositions.

This is where two relatively unrecognized regional bank stocks could offer the ballast and strength you're looking for. They're among the most promising growth plays you can find in this tumultuous market.

1. KeyCorp (KEY)

First, some context. On average, analysts expect Citigroup's earnings per share to decline 5% this year from 2015. Analysts are also expecting Morgan Stanley to eke out EPS growth of only 1 cent, or 0.4% in 2016. Wells Fargo, which is often considered the best of the big banks, is expected to deliver EPS growth of 2.4%

In this environment, Cleveland-based KeyCorp is expected to deliver EPS growth of nearly 9% in 2016 and then 20% in 2017. Investors should pay attention a company that's expected to turn in such strong results.

With assets of $96 billion and deposits of $71 billion, this regional bank serves individuals, small businesses and corporations. It offers community banking in 12 states and has corporate banking offices across the U.S. 

KeyCorp stock pays a quarterly dividend, and management plans to raise it to 8.5 cents a share in the second quarter of this year from 7.5 cents. The current dividend yield is 2.7%.  

KeyCorp should benefit from its planned acquisition of First Niagara Financial (FNFG) . KeyCorp says the deal will give the combined bank a leading presence in Upstate New York and will create the 13th largest commercial bank in the U.S. KeyCorp also says it will created cost savings of $400 million.

KeyCorp stock trades at only 0.89 of its book value, making the stock a value compared with banks such as U.S. Bancorp and Glacier Bancorp, which have price-to-book ratios of 1.74 and 1.82, respectively.

2. BankUnited  (BKU)

BankUnited is a regional institution focused on Florida. It also has banking centers in the New York City area. The company rose out of the ashes of the financial crisis. In 2009 investors led by John A. Kanas purchased most of the old BankUnited after it had been seized by regulators. The new BankUnited says it is not looking at expanding into higher-risk businesses such as sub-prime lending, credit cards, HELOCs and student loans.

As of the end of last year, BankUnited had $23.9 billion of assets, $17.1 billion of loans and leases, and $16.9 billion of total deposits.

The company's balance sheet is well diversified, and BankUnited says its ratio of nonperforming assets , or NPA ratio, is lower than those of its peers (with assets in $10 billion-$50 billion range).

The stock's 2.4% dividend yield (with a low payout ratio and good record of dividend growth) is backed by revenue growth that's well above the industry average. According to Morningstar, BankUnited's average revenue growth over the past three years was 8.1%, compared with 4.0% for the industry. Another positive is that the bank is now free cash flow positive

Currently, BankUnited has a price/earnings-to-growth ratio (or PEG ratio) of 1.20 based on expectations that its earnings will grow at an annual average of 13.2% over the next five years. That makes it look like a bargain compared with peers BB&T (1.91 PEG), SunTrust Banks (2.16 PEG) and Regions Financial (1.28 PEG).

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The author is an independent contractor. At the time of publication, the author held no positions in the stocks mentioned.

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