Few Good Buys in Regional Banks

Regional banks generally met or exceeded Standard & Poor’s earnings estimates for the third quarter, but the strong run-up in stock prices this year means many of these issues appear fully valued. “Going forward, I’m not worried about companies making their numbers,” says James O’Brien, a bank analyst at S&P. “But I don’t see any potential for upside surprise. We’re expecting only high-single-digit growth in per-share earnings. The banks tend to be cautious in their outlooks. But valuations appear very high to us.”

Indeed, regional banks are now trading above their historical valuations. According to O’Brien, small-cap banks are trading at about 18 times projected 2004 earnings and 16 times estimated 2005 earnings. In the mid-cap area, they’re selling at 16 times estimated 2004 earnings and 15 times projected 2005 profits. “How can you get excited about paying a p-e of 16 for something that’s a 9% grower?” O’Brien says.

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