Fifth Third Bancorp (FITB)—like  many other regional banks—has struggled through the current market environment and the stock is down more than 70% in the last year. The Ohio super regional bank has been hamstrung by bad real estate bets in the particularly depressed markets of Michigan and Florida.  The credit crunch is also making the real estate downturn that much more worrisome. Furthermore, Ohio banks are struggling mightily of late (FITB, KeyCorp, and National City to name a few) which does not bode well for the state’s economy going forward, as jobs continue to steadily leave the rust-belt. Today, FITB was downgraded by an analyst at BMO Capital and the stock is off more than 12%.

In a value methodology, such as ours, it is of great importance to be able to distinguish between a real potential value play and a “value trap”. The trouble for Fifth Third right now is that it was too exposed to the most inflated regions of the real estate bubble and those areas have plunged in value the fastest once the bubble burst. The national real estate market may well take a year or more to recover, but FITB’s holdings have likely already taken the bulk of their losses. The BMO analysts’ concern stemmed from the possibility of a dividend cut. While a dividend cut is distressing to shareholders, FITB’s dividend yield is a whopping 13% and there is no logical reason why a company should continue paying such a generous dividend while absorbing huge losses in its mortgage portfolio.

The stock continues to hit new 52-week (and multi-year) lows and the trading volume balloons on down trading days—such as today. There are a lot of reasons for pessimism about the stock, but a contrarian investor might identify this as an opportunity. Our valuation model is more attune to the company’s cash flow and revenues, as compared to historical norms. From this perspective there is reasonable cause for cautious optimism.

While revenue growth has slowed in the tough economy, FITB has historically traded at 3.1-4.3 times revenue. However, the stock is currently trading only at 1.08, which is about 35% of the low end of its historically normal range. The price-to-cash number is also at an extremely low level as the stock normally trades at cash flow multiples of 15.9-22.3. The price-to-cash flow measure currently stands at 6.67. So, by extension of this logic, if FITB could rebound to just the low end of the stocks historically normal price-to-sales and price-to-cash metrics, we would expect the stock to trade above $32. There is significant potential for a patient, long term investor who can ride out the stock until it rebounds because the current valuation is compelling.

Regional bank, National City Corporation ( NCC) appears to be in discussions to either sell all or a portion of itself and the most likely suitor is NCC’s cross-town (Cleveland) rival KeyCorp. ( KEY). Other potential buyers include larger banks Wells Fargo, JP Morgan/Chase or PNC. NCC has been in a tailspin of late, losing more than 70% in the last year. Much of this loss is because of NCC’s mortgage industry exposure. Mortgage losses were a key contributor to NCC’s very disappointing results for the fourth quarter–net income was only 6 cents per share compared to 36 cents the year before. NCC’s exposure to bad debt makes this acquisition far from certain but the bank does have substantial assets and could be an attractively-priced growth opportunity for KeyCorp.

In January, National City slashed its dividend almost in half to 21 cents from 41 in an effort to deal with its burgeoning credit troubles. In addition to cutting the dividend, NCC raised $1.6b in capital through the issuance of debt and preferred stock as a means to shore up the balance sheet after incurring subprime mortgage losses of $333 million in the 4^th quarter. Further contributing to its problem is the fact that NCC is primarily located in the struggling economic regions of Ohio and Michigan. Even so, there may be enough appeal for regional banks such as NCC to attract attention from either rival banks or private equity firms because of the stock’s greatly depressed valuation. National City is a relatively large bank and its $2.7b deposit base is a compelling asset. NCC also has a $1b stake in Visa, which is an attractive asset, but with a catch as NCC is not yet able to sell those shares in the secondary market.