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By Jeremy Glaser and Jim Leonard, CFA | 01-11-2013 11:00 AM

A Bond Pick With More Spread in Regional Banking

Bank credit investors should take a look at banks that can't release capital now, but have a positive credit trend, says Morningstar senior securities analyst Jim Leonard.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

Regional banks have been in focus recently, and I am here with Jim Leonard, a senior securities analyst at Morningstar, to get his take on the industry and the best way to play it.

Jim, thanks talking with me.

Jim Leonard: Anytime.

Glaser: So, let's take a look at regional banks as a whole. How they are performing and how has that been different than some of the larger banks that we might hear about more often?

Leonard: Well, I think what we've seen since the credit crisis--and this has been a theme from us for a while--is that regional banks have continued to improve, have continued to do better, and really stabilized themselves. If you look at some of the credit metrics from the credit crisis--and let's call that, let's say 2008--most of the nonperforming asset reserves are back to where they were at the beginning of the crisis; nonperforming assets to total assets have just about gotten back to where they were pre-crisis.

But one of the critical issues is that tangible common equity to tangible assets, which we can think of as their capital base, has actually improved since the credit crisis. So, for the average regional bank, you would be looking at tangible common equity to tangible assets of, let's say, just over 7%; where nowadays the average bank is almost 9%.

Glaser: These regional banks don't necessarily have the same international exposure, or have some of the same worries that you might have with the J.P. Morgans or the Citigroups of the world?

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