While many investors both own and keep tabs on the four major banks on the ASX, somewhat surprisingly, the regional banks get much less attention.
The two banks I am referring to are Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN). These two banks, despite being much smaller than their peers are still large compared with many stocks. Importantly, the regional banks also operate at attractive margins and produce significant profits.
Here are two reasons why these two regional banks deserve consideration alongside the majors –
1) Attractive dividend
The forecast dividend yields of BOQ and BEN (according to consensus estimates provided by Morningstar) in 2016 suggest fully franked yields of 5.6% and 5.4% respectively. This is higher than the 5% forecast yield for Commonwealth Bank of Australia (ASX: CBA).
2) Takeover potential
Australia has the 'Four Pillars' policy which effectively disallows any of the four major banks from merging with or acquiring each other. That policy doesn't extend to the regionals however, which means both BOQ and BEN with their much smaller market capitalisations of $5.1 billion and $6 billion respectively are both potential acquisition targets. It's not just the majors that may look to acquire but also overseas financial institution may be interested if they are looking for a launch pad into the Australian market.
In a low economic growth rate and low interest rate environment, investors are understandably keen to hold stocks with the attributes of above average growth and high yields. While the banks may struggle to grow at rates faster than the wider economy, their yields remain attractive. Shareholders in BOQ and BEN have the extra bonus that they could potentially be beneficiaries of any merger and acquisition activity within the banking sector.
