Zacks’ savings and lending industry is expected to be at full throttle, with robust economic growth and resuming levels of consumer spending. This should encourage loan growth, providing much needed support.
Additionally, digitization efforts and a wave of consolidations to stay relevant will help businesses like Bancorp Investors, Inc. (VSI – Free report), HomeStreet, Inc. (HMST – Free report) and West Bancorporation, Inc. (WTBA – Free Report) to counter competition and emerge stronger than an autonomous institution.
Zacks’ savings and loan business is made up of specialized US banks, which are typically locally owned, and focused on expanding residential mortgage financing. Companies in the sector offer residential mortgages, commercial and industrial mortgages, home equity loans, auto loans and other commercial loans. Institutions finance mortgages with savings insured by the Federal Deposit Insurance Corporation (âFDICâ). They offer high interest rates on savings to attract deposits, thus improving their ability to lend mortgages. Although businesses operate in the same way as commercial banks by providing various banking services such as checking and savings accounts, they were previously legally required to invest at least 65% of their assets in mortgages. Effective July 1, 2019, a decision lifted the restriction for FDIC-insured institutions.
3 savings and credit industry trends to watch
Growth of loans in cards: The macroeconomic outlook for the United States is turning favorable with the reopening of the economy and an increase in the level of business confidence. Levels of consumer spending are also picking up and could be robust over the coming period. In such a scenario, improved consumer behavior will boost mortgage, business, educational and auto lending. This should instill confidence in borrowers and support loan demand in most loan categories. Therefore, loan growth despite low interest rates is likely to support the net interest income and margin of industry players to some extent.
Consolidation wave at peak: Previously, industry players were gaining traction by branding themselves as community-driven mortgage specialists to lure suspicious consumers of large multi-state banking conglomerates. However, the continuing competitive challenges of non-traditional banking services, rabid innovations in fintech, and the potential for stringent regulations make it difficult for businesses to function as stand-alone institutions. This forces industry players to resort to consolidations to keep their heads afloat. In addition, the current difficult operating environment keeps the savings and loan sector on its toes.
The digitization initiatives coming like a breath: Many challenges, including legacy technologies and an imbalanced customer base, have arisen for savings and loan associations. Thus, these companies have strived to accelerate the transition to technology-driven and flexibly functioning institutions in order to remain competitive and reap profits in a rapidly changing market. While technology upgrades are expected to increase short-term non-interest spending, they will support the operations of industry participants and increase market share over time.
Zacks Industry Rankings Shows Strong Outlook
The group’s Zacks Industry Rank, which is essentially the average of the Zacks Rank of all member stocks, indicates good prospects for the near term.
Zacks’ savings and loans industry currently holds a Zacks industry ranking of # 30, which places it in the top 12% of over 250 Zacks industries. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of industries ranked by Zacks is the result of bright earnings prospects for all of the constituent companies. Looking at revisions to overall earnings estimates, it appears that analysts are gaining confidence in the earnings growth potential of this group. Remarkably, the industry’s profit estimates for the current year have been revised up 56.8% since December 2020.
Before we outline a few stocks that you might want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and the valuation image.
Industry Outperforms Sector and S&P 500
Zacks ‘savings and loans industry, a group of 33 stocks within Zacks’ larger financial sector, has outperformed the S&P 500 and its sector over the past year.
While sector stocks collectively rose 26.9%, the S&P 500 Index gained 23.4%. During the same period, Zacks’ financial sector gained 20%.
One-year price performance
Current industry assessment
One can get a good idea of ââthe relative valuation of the industry by looking at its price to book ratio (P / TBV), which is commonly used to value financial companies due to the large variations in their results from a quarter. to the other. .
The industry currently has a 12-month P / TBV of 1.54X, above the median level of 1.52X for the past five years. This compares to the highest level of 10.15X and the lowest level of 0.84X during the same time period.
However, the sector is trading at a discount to the S&P Index, as the 12-month P / TBV ratio for the S&P 500 is 17.07X and the median level is 11.37X.
Tangible Price / Pound Ratio (TTM)
Since financial stocks generally have a low P / TB ratio, comparing savings and loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P / TB ratio with that of its larger industry ensures that the group is trading at a decent discount. The 12 month P / TBV of Zacks Finance sector of 4.37X for the same period is higher than the respective ratio of Zacks’ savings and loans sector.
Tangible Price / Pound Ratio (TTM)
3 savings and loan stocks to bet on
Bancorporation of the West: Based in West Des Moines, IA, WTBA focuses on loan, deposit and trust services for consumers and small to medium-sized businesses. West Bancorporation has seen a decent increase in loans spread across all of its markets over the past few quarters.
For the first nine months of 2021, West Bancorporation recorded loan growth (excluding Paycheck Protection Program or PPP) of 10.1%. In addition, the repayments and repayments of classified loans affect the credit quality of the business. The continuation of these trends will lead to robust organic growth.
Efforts to expand the presence in Minnesota are expected to drive a further increase in lending, while the focus on the commercial and industrial segments has bolstered the strong growth in deposits and cash management activities of the WBTA.
West Bancorporation currently carries a Zacks Rank # 2 (Buy). The consensus mark for the WTBA’s current year earnings rose 2.4% to $ 3.02 in the past two months. This indicates a growth of 52.5% compared to the figure published a year ago. The company’s shares have returned 55.6% in the past year.
Price and consensus: WTBA
Bancorp investors: Headquartered in Short Hills, New Jersey, ISBC operates through 154 branches in New Jersey, New York and Pennsylvania. Investors Bancorp’s consumer banking services include online banking, deposit products, home equity loans, lines of credit and a full suite of mortgages.
In August, Investors Bancorp completed the acquisition of the eight branches of Berkshire Bank in New Jersey and eastern Pennsylvania. The buyout allowed the company to acquire approximately $ 630 million in deposits as well as $ 220 million in consumer and business loans. Last month, Investors Bancorp shareholders approved its proposed merger with another industry participant. The purchaser will purchase all of the outstanding shares of Investors Bancorp for a combination of 10% cash and 90% shares. This should be closed in the first half of 2022.
Going forward, loan growth, improved funding mix and credit quality will support the company’s finances.
Investors Bancorp currently has a Zacks rank of 2. Zacks’ consensus estimate for ISBC earnings in 2021 has risen 1.6% northward to $ 1.27 in the past two months. This indicates year-over-year growth of 35.1%. The company’s shares have climbed 45.3% in the past year.
Price and consensus: VSI
House street: HMST is a diversified commercial and consumer bank headquartered in Seattle, WA, with $ 7.4 billion in assets as of September 30, 2021. HomeStreet has made significant strides in transforming itself into a large-scale commercial bank in expanding its market presence in a very attractive metropolitan area. markets.
The company sold a large portion of its mortgage business in 2019. Such an evolving business model has helped HMST reduce earnings volatility given the volatility of the mortgage market. HomeStreet’s revenue from single-family mortgage banking was reduced from 26% in the third quarter of 2020 to 17% in the third quarter of 2021. Given the expectation of a slight drop in origination and the gain on the activities of sale, mortgage income is expected to be an even smaller share of HomeStreet income in the future.
In the third quarter of 2021, the company’s NII and NIM were relatively stable at $ 57.5 million and 3.42%, respectively. HMST also has a very diverse loan portfolio in terms of products and geography. Management expects lending growth of 10-15% in 2022, mainly due to an increase in commercial real estate loan origination. This also corresponds to an increase in NII, which is likely to drive revenue growth.
HomeStreet profits in 2021 are expected to grow 52.7% year-over-year. Zacks’ consensus estimate for HMST’s earnings in 2021 has improved 1.3% over the past 30 days. Shares of this company Zacks Rank # 2 have climbed 47.4% in the past year.
Price and consensus: HMST