Steer Clear of the American Banker Curse!

Call it a curse. Many of the past winners of American Bankers annual banker of
the year award have soon after befallen some sort of career setback. Ken
Thompson, former CEO of Wachovia, won the award in 2005. Less than three years
later, his firm was sold to Wells Fargo (NYSE: WFC ) in an FDIC-run auction,
barely avoiding collapse. This years recipient is Robert Wilmers, CEO of M&T
Bank (NYSE: MTB ). Despite record earnings, I recommend investors steer clear of
the bankers curse and instead buy regional rival First Niagara Financial Group
(NASDAQ: FNFG ). M&T Bank is one of Berkshire Hathaway s (NYSE: BRK.B , BRK.A )
15 biggest holdings as of the end of November. Warren Buffett owns 5.2 million
shares of the Buffalo bank, considered by many to be one of the best operators
in financial services. M&Ts annual return since 1980 is 19.3%, the best
performance among the top 100 banks in America. With that kind of pedigree, its
hard to bet against it. However, with First Niagaras stock down 33% year-to-date
combined with the fact it actually has outperformed M&T Bank over the past
decade now is a great opportunity to take advantage of the short-term growing
pains facing First Niagara. They wont last forever. In July, First Niagara
announced it was buying 195 branches in New York and Connecticut from HSBC
Holdings (NYSE: HBC ) for $1 billion. As part of the deal, First Niagara will
have to sell approximately 40 branches to meet antitrust regulations. The 155
branches it will keep come with $11 billion in deposits. The merged branch
network will number 440 locations, $18 billion in loans, $30 billion in deposits
and $38 billion in assets. Depending on how many of the 40 branches divested are
in the Buffalo area, First Niagara could end up with more branches in western
New York than M&T Bank. The decision to grow by acquisition has come at a cost
to its business. To finance the deal, First Niagara has had to issue additional
stock and debt that has reduced its tangible book value by 30%. To build its
capital back up, FNFG has cut its quarterly dividend in half to eight cents per
share. While the shares were priced at $8.50, the lowest level since 2002, it
was an encouraging sign that underwriters exercised their overallotment of 3.97
million shares. By exercising the overallotment, it puts an artificial floor
price on its stock while still providing investors with a reasonable yield of
3.8%. Once it has had the opportunity to digest the HSBC branches, Sterne Agee
analyst Matthew Kelly believes First Niagara will be a solid growth play and one
of the better performing banks. In the past two years, First Niagara has made
four acquisitions totaling $2.8 billion. Before all of this M&A action, First
Niagara had just $6.1 billion in deposits. Theyve grown five-fold since July
2008. Its only natural with this much consolidation that First Niagara will
suffer from a little indigestion. Not to worry. By the end of 2014, FNFGs
tangible book value per share should be $8.19, 56% higher than today. Management
suggests the 2012 earnings estimate of $1.09 is 6% to 7% too high. Therefore,
First Niagaras stock currently is trading at 8.5 times forward earnings. Thats
lower than at any time in the past decade, and because First Niagara has cut the
dividend in half, its payout ratio in 2012 will be just 31% and more than
manageable. Bottom Line M&T Bank might have the current banker of the year, but
First Niagara is the better opportunity in 2012. As of this writing, Will
Ashworth did not own a position in any of the aforementioned stocks.