Regional banks worth a look

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Banking stocks have been a scary proposition for investors over the past few years. However, one subsector—regional banks—continues to outperform the industry, largely because these banks don’t face the challenges that plague megabanks.

For example, because regional banks, which typically have less than $75 billion in assets, aren’t considered “too big to fail,” as are major national banks, they don’t face as much expensive, time-consuming regulatory scrutiny, says Brett Rabatin of financial-services company Sterne Agee. Smaller banks do better over the long term, compared with big banks—particularly in terms of earnings growth, Rabatin explains. “Once you’re so big, it’s really tough to grow much faster than the overall economy.”

Rabatin recommends the SPDR S&P Regional Banking exchange-traded fund (ETF) (NYSE: KRE; Price: $31.65) for investors who want exposure to the whole subsector. Most other banking ETFs or mutual funds, he cautions, typically don’t focus on regional banks.

If you want to pick individual stocks, Rabatin recommends reading a bank’s filings and seeking banks that have diversified lending, rather than those that focus on a single sector. That way, if one sector falters, the bank’s overall performance won’t suffer greatly.

Rabatin says he likes Western Alliance Bancorp. (NYSE: WAL; Price: $14.34), which more than doubled its net income in 2012, thanks to big revenue growth and efficient operations. He anticipates that run to continue. What you look for is a company that’s growing at a faster pace than the competition is, he says.