Savings and Loan industry will likely continue seeing high originations, benefiting from low mortgage rates and a strong housing demand. Also, improvement in economy, recovery in consumer spending levels and stimulus packages are likely to aid loan growth and thus, provide much needed support. Further, digitization and technological enhancement efforts are anticipated to support the industry in the near term. Thus, some of the industry players like New York Community Bancorp ( NYCB Quick Quote NYCB - Free Report) , Provident Financial Services, Inc. ( PFS Quick Quote PFS - Free Report) and West Bancorporation, Inc. ( WTBA Quick Quote WTBA - Free Report) are poised to benefit from these developments. Industry Description
The Zacks Savings and Loan industry consists of specialized U.S. banks that 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. These institutions fund mortgages with savings that are insured by the Federal Deposit Insurance Corporation (FDIC). They typically offer high interest rates on savings to attract deposits, enhancing their ability to lend mortgages. Though the firms operate similar 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. A ruling, effective Jul 1, 2019, has lifted this restriction for institutions that are insured by the FDIC.
3 Savings and Loan Industry Trends to Watch
Despite supply chain and higher pricing woes, low mortgage rates continue to provide meaningful incentives to Americans to buy homes. The low interest-rate environment is expected to continue as the Federal Reserve has indicated keeping rates at near-zero level in the near term. These are likely to continue driving originations in the ongoing year, and will drive the industry’s growth in the upcoming quarters. In fact, going by the Mortgage Originations to Hold Ground: MBA Mortgage Finance Forecast, purchase originations for single-family homes are estimated to increase in 2021. Moreover, mortgage debt outstanding is also expected to rise in 2021. Hence, with savings and loan associations having stronger emphasis on residential mortgages, this trend should bolster industry prospects. The macro outlook for the United States is becoming favorable with the economy reopening and encouraging progress on the vaccinations front. Consumer spending levels too are recovering and might be robust in the upcoming period. In such a scenario, normalization of consumer behavior will boost mortgage, commercial, education and auto loans. This is expected to instill confidence among the borrowers and support demand for loans. Therefore, loan growth despite low rates, is likely to support the companies’ net interest income and margin to some extent. Loan Growth in the Cards:
A number of challenges have cropped up for the savings and loan associations, including legacy technologies and an unbalanced customer base. Thus, these companies have been making efforts to ramp-up transition into diligently-focused, technology-driven and flexibly-operating institutions, in order to remain competitive and reap profits in the rapidly-evolving market. Though technology upgrades are expected to result in a rise in non-interest expenses in the near-term, the same will support the companies’ financials and enhance market share over time. Digitization Initiatives to Come as a Breather: Zacks Industry Rank Indicates Solid Prospects
The group’s Zacks
Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects.
The Zacks Savings and Loan industry currently carries a Zacks Industry Rank #57, which places it in the top 23% of more than 250 Zacks industries. 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 top 50% of the Zacks-ranked industries is a result of bright earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Remarkably, the industry’s earnings estimates for the current year have been revised 64.7% upward since August 2020.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector and the S&P 500
The Zacks Savings and Loan Industry, a 35-stock group within the broader Zacks
Finance Sector, has outperformed the S&P 500 and its own sector over the past year. While the stocks in this industry have collectively rallied 48.2%, the S&P 500 Composite has gained 36.3%. During the same time period, the Zacks Finance Sector has gained 36.9%. 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 results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 1.57X, below the median level of 1.50X, over the past five years. This compares with the highest level of 9.97X and the lowest level of 0.84X over this period.
However, the industry is trading at a discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 22.24X and the median level is 11.67X.
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. But 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 trailing 12-month P/TBV of 4.52X for the same period is above the Zacks Savings and Loan industry’s respective ratio.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research 3 Savings and Loan Stocks Worth Betting on
West Bancorporation, Inc.: Headquartered in West Des Moines, IA, focuses on lending, deposit services, and trust services for consumers and small- to medium-sized businesses. The company has witnessed decent rise in loans spread across all its markets over the past few quarters. A strong pipeline indicated by management is encouraging and will enable the company to deliver robust growth. Strategic efforts to expand presence in Minnesota is likely to drive further loan increment while focus on commercial and industrial segments has been bolstering strong deposits growth and treasury management business. Credit trends are also likely to improve with the company projecting sale of a non-accrual loan next month.
West Bancorporation sports a Zacks Rank #1 (Strong Buy) at present. The consensus mark for current-year earnings has moved up 10.5% to $2.95 in the past week. Shares of the company have returned 57.7% year to date.
Price and Consensus: WTBA Image Source: Zacks Investment Research New York Community Bancorp: The company provides traditional and non-traditional products and services, and access to multiple service channels, including online banking and mobile banking. It is also a leading producer of multi-family loans in New York City.
This Westbury, NY-based company’s declining expense base (due to branch closures and divesture of unprofitable businesses) and expansion efforts through acquisitions are expected to aid financials. Recently, shareholders of New York Communityapproved the proposed all-stock merger deal with Flagstar Bancorp, Inc. Also, the prevailing low interest-rate environment is likely to support margins as its balance sheet is liability sensitive.
The stock presently carries a Zacks Rank of 2 (Buy). The Zacks Consensus Estimate for 2021 earnings has moved 3.3% north to $1.26 over the past week. Shares of the company have climbed 14.7% in the year-to-date period.
Price and Consensus: NYCB Image Source: Zacks Investment Research Provident Financial Services, Inc.: It is the holding company for Provident Bank that offers variety of financial products and services through its network of branches across northern and central New Jersey, as well as in Pennsylvania and Queens County in New York.
Provident Financialhas significant exposure in mortgage loans, including residential mortgage, commercial mortgage, and multi-family mortgage. Given the robust outlook for mortgage origination in 2021, the company is likely to capitalize on this trend given its strong liquidity position. Moreover, recovery in consumer sentiment is also expected to boost its commercial and industrial loan portfolio. Efforts to manage operating expenses and investments in new technologies offer scope for long-term growth.
The stock presently carries a Zacks Rank of 2. The Zacks Consensus Estimate for 2021 earnings has moved 8.7% north to $2.12 over the past week. Shares of the company have climbed 22.3% in the year-to-date period.
Price and Consensus: PFS
Image Source: Zacks Investment Research