Are small banks good investments

Are small banks stocks good investments? Smart money is saying many small banks are good value picks right now.

Every Friday afternoon for the past year, it’s been the small-bank death watch: Which U.S. bank would federal regulators seize next?

In 2009, it was 140 banks stretching from Florida to Washington state. The number is 85 and counting so far this year, including two failures announced late Friday. Yet with federal banking reform moving ahead this week, shares of the smallest community banks are a good bet on any recovery in the credit cycle, say money-managers and industry analysts, who are becoming more bullish about a turnaround for banks with assets of $1 billion or less. See how financial stocks fared on Friday.

Smart investors are starting to realize that we are in value territory for the right banks, the strong will continue to get stronger and the weak will get weaker. Lawmakers reach a deal for new rules governing the banking industry. Analysts say the deal isn’t as stringent as many had feared, bringing relief to investors. Small banks caught a break from Congress in the financial regulatory bill that passed on Friday. With regard to capital requirements, the banks will be allowed to count some trust-preferred securities, a form of hybrid debt capital, towards their capital standards, easing them of the onerous burden of raising new common equity.

The smaller operators also will have to contribute less money than big banks to the FDIC deposit insurance fund, which will save them $4.5 billion collectively over the next three years.

Like their larger peers, tiny community banks have been struggling under the weight of the massive credit crunch. Since the end of 2007, when the U.S. recession took hold, the SNL Small Bank Index is down 36% as of June 24, compared to a 14% decline for the S&P Small Cap 600 Index and a 23% drop for the Russell Microcap Index.

Yet lately small bank stocks have been gaining traction. So far this year, the SNL Bank Index is up 14%, outpacing the 2% gain for the S&P Small Cap Index and a 3% gain for the Russell Microcap Index.

Investors and analysts who specialize in microcap banks say the ones that will emerge from the economic downturn in stronger shape are the banks that didn’t make too many loans on speculative construction of commercial buildings, strip malls, or housing developments.

Value stock picks  are stocks whose share price are at bargain levels with solid fundamentals. Small banks are great investments for the value traders.