n the last few years, smaller, regional financial institutions did much better than their larger counterparts. With rising interest rates, positive seasonality kicking in, and mild headwinds in the form of tighter M&A regulation — regional financials are worth a deeper look.
While everyone knows the big four, hundreds of smaller publicly listed financial institutions exist, and many are strong investment prospects.
One such regional is Truist Financial Corporation ($TFC). Operating since 1872, TFC is an established banking and trust services provider in the Southeastern and Mid-Atlantic United States. With 2,517 offices, TFC is one of the super-regional banks, which is also seen from its extensive acquisition activity, with recent transactions like the buyout of BankDirect Capital Finance for $3.4bn, and other reinsurers for undisclosed amounts.
Despite these acquisitions, TFC boasts an exceptionally healthy balance sheet with 88% of its liabilities coming from low-risk sources of funding, an appropriate loan to assets ratio of 55%, and a low level of bad loans at 0.4%. Net margin stands at 25% - which is comparable to the largest banks, but leverage is significantly lower, as its debt-to-equity ratio is at 80%. TFC is almost a value play relative to bigger banks.
Finally, TFC pays an attention-capturing dividend. It has a notable yield of 4.4%, exceeding the industry average of 3.1%. The dividend has grown over the years, with the latest raise of 8% in July, and the dividend has more than tripled over the last decade. The dividend is sustainable too; the 43% payout ratio implies it is well covered by earnings.
From a technical perspective, it is easy to identify a $45-52 range where the stock has been for almost two quarters. A clear break above signals the move upwards towards $56, while the company still has plenty of its $4.3b buyback budget to defend the support around $45.
Another institution, Coastal Financial Corporation ($CCB), is a bank holding company for Coastal Community Bank that provides various financial services to small and medium enterprises (SMEs) in Washington.
In Washington state, SMEs have been employing the majority of the workforce. The state has one of the highest small business startup rates in the country. This isn’t surprising, given the largest concentration of STEM workers and the large volume of foreign trade.
In this environment, financing is essential. Thus, it is unsurprising to see exceptional growth prospects with forecast annual earnings growth to the tune of 40%, way above the industry average of 10.5%. While this translates into a higher P/E ratio, 18x for such growth prospects doesn’t seem like an exaggeration.
Looking into CCB’s balance sheet, the first thing to notice is a minuscule amount of debt, to the tune of $28MM. Furthermore, the allowance for bad loans is very high while their level is barely 0.2%. Almost all of its liabilities (98%) are made up of low-risk sources of funding, and the bank has appropriate levels of loans to assets and deposits.
CCB has been listed for just four years and doesn’t pay a dividend yet, which is not uncommon for a growing financial institution.