EXCLUSIVE: Regional Banks A Buying Opportunity Amid 'Ridiculously Cheap Valuations,' Veteran Value Investor Says

Amid a tumultuous week for regional banks, marking their worst performance since the March 2023 sell-off, Tim Melvin, a seasoned value investor with over three decades of experience, remains undeterred in his bullish outlook on the sector.

Despite widespread pessimism, Melvin identifies the current market conditions as ripe with opportunity for patient investors.

Melvin on New York Community Bancorp’s Isolated Decline

In an exclusive interview with Benzinga, Melvin addressed the recent sell-off of New York Community Bancorp NYCB, emphasizing that this should not be seen as indicative of a sector-wide issue.

Melvin remarked the unique situation of NYCB. With assets surpassing the $100 billion mark, NYCB is considered a systemic bank, which is subject to stricter regulations regarding mandatory reserves and liquidity.

Shares of NYCB have fallen 42% this week, while the broader regional banking sector, as gauged by the SPDR S&P Regional Banking ETF KRE, fell 7%.

Read also: Investors On Edge As Regional Bank Sell-Off Highlights Vulnerability Of US Banks

Commercial Real Estate Exposure: A Divergent Impact

Melvin pointed out the differences in bank exposure to commercial real estate, particularly office spaces affected by the shift towards remote work.

He argues that regional banks, which typically have less exposure to businesses in major cities, face fewer risks.

“There’s one hell of a difference between an office tower in Manhattan or Seattle compared to a suburban or small town office building,” Melvin said.

He suggests that while central business districts struggle with ongoing remote work trends, smaller towns and suburban areas, where local businesses and regional headquarters operate at full capacity, are less vulnerable.

“There will be a loan reset,” he stated, predicting an increase in rents and loan repayments, particularly in less urbanized areas. This reset, according to Melvin, will bolster small-town real estate, mitigating the risk of significant losses.

Dispelling Fears and Highlighting Value

Melvin criticized the pervasive pessimism surrounding regional bank stocks, pointing out the irrationality of their current valuations.

“There’s a fear of banks and bank stocks. These stocks are ridiculously cheap, with single-digit PE ratios trading at or below book value. That is absurd,” he argued.

With banks holding more capital than in recent years and interest rates stabilizing in a higher-for-longer environment, Melvin sees a clear buying opportunity for patient, aggressive investors.

Melvin also commented on the ongoing consolidation within the banking sector, noting it as a necessary evolution given the competitive landscape, which includes around 4,500 banks and 2,700 credit unions.

“Consolidation in an extremely competitive sector is still ongoing, and healthy bank mergers are necessary,” he said, reinforcing his optimistic outlook.

“I’m aggressively optimistic on regional banks, as the overall sector is extremely cheap,” Melvin remarked.

His advice to investors is clear: focus on banks with minimal exposure to high-risk sectors, and prepare for a market rebound driven by strategic consolidation and inherent value within the regional banking sector.

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Image created with photos from Benzinga and Shutterstock