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3 Savings & Loan Stocks to Buy Despite Grim Industry Prospects
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The Zacks Savings and Loan industry has been caught up in the commercial real estate market woes. Given the deterioration in asset quality, industry players are increasing provisions. Moreover, high interest rates have increased funding costs. This, along with tightening lending standards across the board, is likely to affect lending activities.
Nonetheless, inorganic efforts and attractive business models on strong relationship banking will help WSFS Financial Corporation (WSFS - Free Report) , Provident Financial Services (PFS - Free Report) and Riverview Bancorp (RVSB - Free Report) and to tide through the gloom in the banking space.
Industry Description
The Zacks Savings and Loan industry consists of specialized U.S. banks, which are generally locally owned, with a focus on extending residential mortgage finance. Companies in the industry provide residential mortgages, commercial and industrial mortgages, home equity loans, vehicle loans, and other business loans. The institutions fund mortgages with savings insured by Federal Deposit Insurance Corporation ("FDIC"). They offer high interest rates on savings to attract deposits, enhancing their ability to lend mortgages. Although the firms operate similarly to commercial banks by providing various banking services, such as checking and savings accounts, they were previously legally bound to invest at least 65% of their asset holdings in mortgages. Effective Jul 1, 2019, a ruling lifted the restriction for institutions insured by the FDIC.
3 Savings and Loan Industry Trends to Watch
Slowing Loan Demand:The central bank’s aggressive monetary policy of last year lowered the demand for loans due to fears of an economic downturn. Further, projections of a slowdown in economic growth have dampened loan demand. The high interest rates are keeping the borrowers on the sidelines. Hence, the lending backdrop is expected to be subdued, as the demand for loans continues to wane. Constrained funding for banks may also limit loan growth in the upcoming period as banks are experiencing high funding costs.
Weakening Asset Quality:Rising interest rates and declining commercial real estate values have affected the credit quality of this loan category, making loan refinancing challenging. This has increased the financial risks for many industry players and also affected their credit quality. Hence, given the current macroeconomic headwinds, industry players are building provisions to counter any fallout. While conservative lending policy and the resilience of borrowers helped banks to keep their asset quality manageable, several metrics have started rising. This, thus, signals the gradual deterioration of the industry players’ asset quality.
Digital Ramp-Ups to Come as a Breather: Numerous challenges, including legacy technologies and an unbalanced customer base, have cropped up for savings and loan associations. Thus, the companies have been trying to ramp up the transition to digitally focused, technology-driven and flexible operating institutions to remain competitive and reap profits in the rapidly evolving market. Though technology upgrades are expected to raise non-interest expenses in the near term, the same will support the industry participants' customer experience and operational efficiency over time.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Savings and Loan industry currently carries a Zacks Industry Rank #219, which places it in the bottom 13% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dismal near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of a bleak earnings outlook for the constituent companies in aggregate.
Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry's recent stock market performance and the valuation picture.
Industry Underperforms Sector and the S&P 500
The Zacks Savings and Loan Industry has widely underperformed the Zacks Finance Sector and the S&P 500 composite over the past year.
The stocks in the industry have collectively gained 7%, whereas the S&P 500 Index has risen 25.6%. In the same period, the Zacks Finance Sector has grown 24.2%.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
One might get a good sense of the industry's relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing finance companies because of large variations in their earnings from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 0.65X, below the median level of 1.37X over the past five years.
However, the industry is trading at a discount compared with the S&P Index, as the trailing 12-month P/TBV ratio for the S&P 500 is 10.99X and the median level is 10.32X.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
As finance stocks typically have a low P/TB ratio, comparing Savings and Loan providers with the S&P 500 might not make sense to many investors. However, a comparison of the group's P/TB ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector's current trailing 12-month P/TBV of 4.12X is above the Zacks Savings and Loan industry's ratios.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
3 Savings and Loan Stocks to Buy
Provident Financial: The company offers a comprehensive suite of financial products and services through its extensive network of branches throughout northern and central New Jersey, as well as Bucks, Lehigh and Northampton counties in Pennsylvania, and Nassau and Queens Counties in New York.
The company reported assets of $19.8 billion as of Mar 31, 2024, and loans held for sale at fair value of $5.20 billion.
In March, the company and Lakeland Bancorp, Inc. received regulatory consent from the Federal Deposit Insurance Corporation, and the New Jersey Department of Banking and Insurance to complete their previously announced merger. The merged entity is projected to have 4% of all bank deposits in the state.
The combined franchise will benefit from incremental revenue growth opportunities. It will include Provident Financial’s fee-based insurance and wealth management businesses, as well as LBAI’s growth in asset-based lending, equipment lease financing and mortgage warehouse lending.
Given the expectation of an improving mortgage origination market, the company’s mortgage banking revenues are likely to improve in the upcoming period. It expects a double-digit operating return on equity in 2024. Provident Financial expects the servicing business to continue driving earnings, with additional upside potential from the production segment, backed by improvement in the origination market.
PFS presently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its 2024 earnings is pegged at $1.64, indicating marginal upward revision. Revenue estimates for 2024 are pegged at $672.2 million, indicating a year-over-year rise of 40.3%. Shares of the company have lost 28.6% in the past year.
Riverview Bancorp: The company, with assets of $1.52 billion as of Mar 31, 2024, offers community banking services and financial products to commercial and retail clients through 17 branches.
In fourth-quarter fiscal 2024 (ended Mar 31, 2024), it restructured part of its balance sheet by selling $46.2 million of its lower-yielding investment securities portfolio and used the sale proceeds of $43.5 million to repay higher-cost borrowing. The total pre-tax loss of this transaction was $2.7 million. The move will improve margins and profitability. The bank is well-positioned for a high rate environment, given the strength of its core deposit base.
RVSB presently carries a Zacks Rank of 2. The Zacks Consensus Estimate for fiscal 2024 earnings is pegged at 25 cents, which has seen a 38.8% upward estimate revision in the past week. Fiscal 2024 revenues are expected to rise 5.1% year over year to $50.8 million. Shares of the company have gained 10.4% in the past year.
Price and Consensus: RVSB
Image Source: Zacks Investment Research
WSFS: This is a multi-billion-dollar financial services company with $20.6 billion in assets on its balance sheet, and $80.5 billion in assets under management and administration as of the first-quarter 2024 end. WSFS operates from 114 offices across Pennsylvania, Delaware, New Jersey, Florida, Nevada and Virginia. It provides comprehensive financial services, including commercial banking, treasury management, consumer banking, and trust and wealth management services.
The company is ranked sixth in deposits for the fifth largest MSA depository in the United States. Its relationship-based banking generates resilient deposits, high margins and fee opportunities. Its 2024 outlook seems encouraging. It expects mid-single-digit loan growth and low-single-digit deposit growth. Also, the net interest margin is expected to be 3.80-3.90%. Fee revenues are expected to grow in the double-digit range, whereas the efficiency ratio is projected to be 60%.
WSFS presently carries a Zacks Rank of 2. The Zacks Consensus Estimate for the company’s current-year earnings is pegged at $4.25, indicating a 2.4% year-over-year rise. Revenues for 2024 are expected to be $1.02 billion. Shares of the company have gained 9% in the past year.
Price and Consensus: WSFS
Image Source: Zacks Investment Research
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3 Savings & Loan Stocks to Buy Despite Grim Industry Prospects
The Zacks Savings and Loan industry has been caught up in the commercial real estate market woes. Given the deterioration in asset quality, industry players are increasing provisions. Moreover, high interest rates have increased funding costs. This, along with tightening lending standards across the board, is likely to affect lending activities.
Nonetheless, inorganic efforts and attractive business models on strong relationship banking will help WSFS Financial Corporation (WSFS - Free Report) , Provident Financial Services (PFS - Free Report) and Riverview Bancorp (RVSB - Free Report) and to tide through the gloom in the banking space.
Industry Description
The Zacks Savings and Loan industry consists of specialized U.S. banks, which are generally locally owned, with a focus on extending residential mortgage finance. Companies in the industry provide residential mortgages, commercial and industrial mortgages, home equity loans, vehicle loans, and other business loans. The institutions fund mortgages with savings insured by Federal Deposit Insurance Corporation ("FDIC"). They offer high interest rates on savings to attract deposits, enhancing their ability to lend mortgages. Although the firms operate similarly to commercial banks by providing various banking services, such as checking and savings accounts, they were previously legally bound to invest at least 65% of their asset holdings in mortgages. Effective Jul 1, 2019, a ruling lifted the restriction for institutions insured by the FDIC.
3 Savings and Loan Industry Trends to Watch
Slowing Loan Demand: The central bank’s aggressive monetary policy of last year lowered the demand for loans due to fears of an economic downturn. Further, projections of a slowdown in economic growth have dampened loan demand. The high interest rates are keeping the borrowers on the sidelines. Hence, the lending backdrop is expected to be subdued, as the demand for loans continues to wane. Constrained funding for banks may also limit loan growth in the upcoming period as banks are experiencing high funding costs.
Weakening Asset Quality: Rising interest rates and declining commercial real estate values have affected the credit quality of this loan category, making loan refinancing challenging. This has increased the financial risks for many industry players and also affected their credit quality. Hence, given the current macroeconomic headwinds, industry players are building provisions to counter any fallout. While conservative lending policy and the resilience of borrowers helped banks to keep their asset quality manageable, several metrics have started rising. This, thus, signals the gradual deterioration of the industry players’ asset quality.
Digital Ramp-Ups to Come as a Breather: Numerous challenges, including legacy technologies and an unbalanced customer base, have cropped up for savings and loan associations. Thus, the companies have been trying to ramp up the transition to digitally focused, technology-driven and flexible operating institutions to remain competitive and reap profits in the rapidly evolving market. Though technology upgrades are expected to raise non-interest expenses in the near term, the same will support the industry participants' customer experience and operational efficiency over time.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Savings and Loan industry currently carries a Zacks Industry Rank #219, which places it in the bottom 13% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dismal near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of a bleak earnings outlook for the constituent companies in aggregate.
Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry's recent stock market performance and the valuation picture.
Industry Underperforms Sector and the S&P 500
The Zacks Savings and Loan Industry has widely underperformed the Zacks Finance Sector and the S&P 500 composite over the past year.
The stocks in the industry have collectively gained 7%, whereas the S&P 500 Index has risen 25.6%. In the same period, the Zacks Finance Sector has grown 24.2%.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
One might get a good sense of the industry's relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing finance companies because of large variations in their earnings from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 0.65X, below the median level of 1.37X over the past five years.
However, the industry is trading at a discount compared with the S&P Index, as the trailing 12-month P/TBV ratio for the S&P 500 is 10.99X and the median level is 10.32X.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
As finance stocks typically have a low P/TB ratio, comparing Savings and Loan providers with the S&P 500 might not make sense to many investors. However, a comparison of the group's P/TB ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector's current trailing 12-month P/TBV of 4.12X is above the Zacks Savings and Loan industry's ratios.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
3 Savings and Loan Stocks to Buy
Provident Financial: The company offers a comprehensive suite of financial products and services through its extensive network of branches throughout northern and central New Jersey, as well as Bucks, Lehigh and Northampton counties in Pennsylvania, and Nassau and Queens Counties in New York.
The company reported assets of $19.8 billion as of Mar 31, 2024, and loans held for sale at fair value of $5.20 billion.
In March, the company and Lakeland Bancorp, Inc. received regulatory consent from the Federal Deposit Insurance Corporation, and the New Jersey Department of Banking and Insurance to complete their previously announced merger. The merged entity is projected to have 4% of all bank deposits in the state.
The combined franchise will benefit from incremental revenue growth opportunities. It will include Provident Financial’s fee-based insurance and wealth management businesses, as well as LBAI’s growth in asset-based lending, equipment lease financing and mortgage warehouse lending.
Given the expectation of an improving mortgage origination market, the company’s mortgage banking revenues are likely to improve in the upcoming period. It expects a double-digit operating return on equity in 2024. Provident Financial expects the servicing business to continue driving earnings, with additional upside potential from the production segment, backed by improvement in the origination market.
PFS presently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its 2024 earnings is pegged at $1.64, indicating marginal upward revision. Revenue estimates for 2024 are pegged at $672.2 million, indicating a year-over-year rise of 40.3%. Shares of the company have lost 28.6% in the past year.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: PFS
Image Source: Zacks Investment Research
Riverview Bancorp: The company, with assets of $1.52 billion as of Mar 31, 2024, offers community banking services and financial products to commercial and retail clients through 17 branches.
In fourth-quarter fiscal 2024 (ended Mar 31, 2024), it restructured part of its balance sheet by selling $46.2 million of its lower-yielding investment securities portfolio and used the sale proceeds of $43.5 million to repay higher-cost borrowing. The total pre-tax loss of this transaction was $2.7 million. The move will improve margins and profitability. The bank is well-positioned for a high rate environment, given the strength of its core deposit base.
RVSB presently carries a Zacks Rank of 2. The Zacks Consensus Estimate for fiscal 2024 earnings is pegged at 25 cents, which has seen a 38.8% upward estimate revision in the past week. Fiscal 2024 revenues are expected to rise 5.1% year over year to $50.8 million. Shares of the company have gained 10.4% in the past year.
Price and Consensus: RVSB
Image Source: Zacks Investment Research
WSFS: This is a multi-billion-dollar financial services company with $20.6 billion in assets on its balance sheet, and $80.5 billion in assets under management and administration as of the first-quarter 2024 end. WSFS operates from 114 offices across Pennsylvania, Delaware, New Jersey, Florida, Nevada and Virginia. It provides comprehensive financial services, including commercial banking, treasury management, consumer banking, and trust and wealth management services.
The company is ranked sixth in deposits for the fifth largest MSA depository in the United States. Its relationship-based banking generates resilient deposits, high margins and fee opportunities. Its 2024 outlook seems encouraging. It expects mid-single-digit loan growth and low-single-digit deposit growth. Also, the net interest margin is expected to be 3.80-3.90%. Fee revenues are expected to grow in the double-digit range, whereas the efficiency ratio is projected to be 60%.
WSFS presently carries a Zacks Rank of 2. The Zacks Consensus Estimate for the company’s current-year earnings is pegged at $4.25, indicating a 2.4% year-over-year rise. Revenues for 2024 are expected to be $1.02 billion. Shares of the company have gained 9% in the past year.
Price and Consensus: WSFS
Image Source: Zacks Investment Research