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Stock to Watch: Regions Financial a bargain bank Add to ...

Regions Financial Corp.

Thursday’s close : $7.65 a share

52-week trading range : $5.46 to $8.00 a share

Annual dividend : 4 cents a share for yield of 0.53 per cent.

Analysts’ ratings : There were 15 buys, 13 holds and 2 sells, according to Bloomberg data. Target prices ranged from $7 a share by analysts at Sanford C. Bernstein & Co., FBR Capital Markets and Deutsche Bank to $9.50 a share by SunTrust Robinson Humphrey analyst Jennifer Demba.

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Recent history : Shares of the Birmingham, Alabama-based regional bank have gained nearly 34 per cent (including dividends) over the past year. Regions Financial, whose shares once traded in at nearly $39 a share in 2006, plunged to below $5 during the 2008-2009 financial crisis. The bank struggled with loan losses as its real estate portfolio is concentrated in areas like the U.S. southeast that was hit hard by the housing market collapse. The bank received a $3.5-billion government bailout that was repaid last April, and returned to profitability last year.

Manager insight : Regions Financial’s stock has had nice run, but will continue to keep climbing because of broad economic trends that will take place over many years, suggests Paul Harris, a portfolio manager with Avenue Investment Management Inc. “It was a vicious cycle in 2008-2009, but now you are going through a very virtuous cycle in banking.”

The retail bank will benefit from a U.S. housing recovery, said Mr. Harris, who bought the bank’s shares in late January.“It is also in a very good part of the United States, which is going to see a lot more growth [in manufacturing] over the next several years. People are moving to that area.”

After U.S. regulators release the results of stress tests next month to determine whether a bank can weather a financial shock, the bank could get approval to buy back shares or increase its dividend, Mr. Harris said. “The payout ratio for 2012 was 6 per cent. I see this moving much higher over the next few years.”

Shares of Regions Financial are still a “bargain” because they trade at 0.7 times book value when Canadian peers trade at 2 times book value, he noted. Regions could return to valuations in the 2.5-to 3-times book range over the next several years, he added. “If I am wrong about this, this stock should at least trade at 1.5 times book or $12 a share.”

While the bank’s net interest margin – a measure of loan profitability – is still under pressure because of low interest rates, lenders like need to improve their operating efficiency. Regions Financial will likely cut costs to improve the bottom line, he said. The loan book of lenders like Regions are also “going to be incredible for the next 10 years because they have tightened lending standards” after the financial crisis, he added.

Not all analysts are upbeat on U.S. banking stocks. “The problem with the analysts’ world is that, because they have been devastated by these stocks and kept on telling people to buy them as they collapsed, they are going to be far too conservative when they [bank stocks] are turning around,” he said. “It happens in the industry all the time.”

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