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Big Banks Take a Licking, Small Banks Keep Ticking.

By Benjamin Shepherd on September 29, 2016

If you don’t care for banks or bankers, you’re in good company.

German behemoth Deutsche Bank (NYSE: DB) is the latest target of global ire as it faces $14 billion in fines related to its role in the mortgage market meltdown. That has brought the short-selling vultures circling with 39 million shares currently sold short, nearly 3% of its shares outstanding. If you read the Wall Street Journal or Financial Times, Deutsche Bank is a house of cards. I’ve seen three of those articles just today, so it’s little wonder that its share price has plummeted from $30 to $12 in the past year.

And Wells Fargo CEO John Stumpf has been in the Congressional hot seat because bank employees opened as many as two million fraudulent accounts to hit sales targets. The political pressure on Stumpf and the bank has been so intense that its board will claw back $41 million in his compensation. That’s having a chilling effect on bank stocks general, especially as Washington is debating cracking down on bank executive pay. (Wells Fargo (NYSE: WFC) is a current Personal Finance holding.)

Even if you think banking is a nasty business, they still make lots of money.  And banks are not created equal. While the major global banks have been having a rough year, smaller regional banks are faring well.

Shares of Deutsche Bank are down 53% over the past year, Wells Fargo has lost 11% and Barclays has plunged 40%. On a total return basis over the same period, Fifth Third Bancorp (NSDQ: FITB), which provides personal and commercial banking in the Midwest and Southeastern US, has gained 13%. Chicago-based MB Financial (NSDQ: MBFI) is up by 20%. Sterling Bancorp, which serves the New York Metro and New Jersey areas, is up by almost 22%.

So So even when a sector is getting panned –actually especially when a sector is getting panned–you can still find moneymakers. In the case of the three regional banks I just named, they’re  attractively valued right now, though their yields tend to fall between 2% and 3%. They’re also not nearly as risky as the banking behemoths.

When you get to be the size of a Deutsche Bank or Wells Fargo it takes a lot of growth to move the needle on revenue and earnings. Unfortunately, that creates the temptation to engage in what I’ll charitably call ethically questionable business practices. I’m not saying the temptation isn’t there for smaller banks, just look at the S&L crisis back in the 1980s, but it isn’t nearly as strong.

So now that banks are taking such a beating, it’s actually a good time to start looking for bargains in the sector, even if you have to go down a bit in size.


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