Forget Westpac Banking Corp and buy Bendigo and Adelaide Bank Ltd instead

I believe investors that are looking for exposure to the banking sector could get great returns by looking beyond the likes of Westpac Banking Corp (ASX: WBC), and instead turn to their smaller regional rivals.

When valued on a price to book ratio, the cheapest of all the banks on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is Bendigo and Adelaide Bank Ltd (ASX: BEN).

The price to book ratio is a key metric used by investors predominantly to compare the banks. It compares the current share price with the book value of net assets per share. The current sector average is a ratio of 1.2, which is in line with the US banking sector which trades on a ratio of 1.15 currently.

However, Bendigo and Adelaide Bank’s shares are currently changing hands at the low multiple of just 0.86x book value. This is a significant discount to the rest of the sector and could be an indication that the shares are on the cheap side with share price appreciation a real possibility.

One catalyst to send the share price higher could be its advanced accreditation application. The bank is still waiting to be granted this by APRA, but if and when it does it will be able to lend far more on the same level of capital it holds at the moment. I believe this would be a boost to its earnings growth even in this low interest environment.

As well as the potential share price gains, investors will be pleased to learn that this regional bank pays a fantastic dividend. Bendigo and Adelaide Bank is set to pay an estimated fully franked 7.2% dividend in FY 2016, which will be the highest in the sector.

In its most recent half-year results I was impressed with the bank’s reduction in its bad and doubtful debts. Year-over-year they dropped 32% to $20.6 million, which I feel is fantastic in the current environment.

Like many of the banks its share price has posted a terrible year so far. But I see the loss of 22% of its market value as a great opportunity for bargain hunters to snap up shares on the cheap. In my opinion, this is a great alternative to the big four banks and one which could provide strong total returns for investors over the next few years.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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