Over the last few years, an improving domestic economy and rising demand for residential mortgages have favored the U.S. savings and loan industry. Rising income of Americans, along with relatively low interest rates, has supported the housing market by enhancing demand for residential mortgages. This has helped the industry grow over this period.
In fact, lesser regulatory supervision and an improving housing market, though at a slow pace, are anticipated to keep driving the industry’s growth in the upcoming quarters too. However, a rising rate environment will likely somewhat dampen loan demand, as consumers will try to avoid taking loans at higher rates. Particularly, weakness in revolving home equity loans may offset growth in the commercial and industrial (C&I), consumer and overall real estate loans to some extent.
For 2018 and after that, multiple challenges will crop up for savings and loan companies, including legacy technologies, new competitors and an unbalanced customer base, in the course of undertaking better initiatives for significant growth. Thus, to remain competitive and reap profits in the rapidly-evolving market, these companies will ramp-up transition into diligently-focused, technology-driven and flexibly-operating institutions.
Industry Lags on Shareholder Returns
Looking at shareholder returns over the past couple of years, it appears that the broader economic recovery wasn’t enough for boosting investors’ confidence in the industry’s growth prospects.
The Zacks Savings and Loan Industry, a 33-stock group within the broader Zacks Finance Sector, has underperformed the S&P 500 and its own sector over the past two years.
While the stocks in this industry have collectively gained 24.1%, the Zacks S&P 500 Composite and Zacks Finance Sector have rallied 34.7% and 25.2%, respectively.
Two-Year Price Performance
Savings and Loan Stocks Trading Cheap
Thanks to the underperformance of the industry over the past two years, the valuation looks cheap now. 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 the most appropriate multiple for valuing finance companies because of large variations in their earnings results from one quarter to the next.
This ratio essentially measures a bank's current market value relative to what it would be worth if all assets were sold, debt was paid and intangible assets were written off.
The industry currently has a trailing 12-month P/TBV ratio of 1.61, slightly below the median level over the past two years. When compared with the highest level of 1.77 in that period, there is apparently decent upside left.
However, the space looks pretty cheap when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 11.05X and the two-year median level is 9.19X.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a lower P/TBV ratio, comparing Savings and Loan Institutions with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of the border sector ensures that the group is trading at a decent discount. The Zacks Finance Sector’s trailing 12-month P/TBV ratio of 3.67X and the median level of 3.54X for the same period are above the Zacks Savings and Loan Industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
Earnings Outlook Doesn’t Indicate Better Prospects
The broader factors should help the industry continue generating positive returns in the near future. But what really matters to investors is whether this group has the potential to continue outperforming the broader market in the quarters ahead.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance going forward is the industry's earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.
Price and Consensus: Zacks Savings and Loan Industry
This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $1.63 'EPS' estimate for the industry for 2018 is not the actual bottom-up dollar EPS estimate for every company in the Zacks Savings and Loan industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the dollar earnings of $1.63 'per share' of the industry for 2018, but how this dollar number has evolved recently.
Current-Year EPS Estimate Revisions
As you can see here, the $1.63 'EPS' estimate for 2018 is declining from the end of April and also from the end of the month period to that. However, the estimate has been up from $1.37 this time last year.
Zacks Industry Rank Indicates Cloudy Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.
The Zacks Savings and Loan industry currently carries a Zacks Industry Rank #150, which places it at the bottom 41% 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.
Our proprietary Heat Map shows that the industry’s rank has been volatile over the past seven weeks.
Savings and Loan Stocks Promise Long-Term Growth
While the near-term prospects look unwelcoming for investors, the long-term (3-5 years) EPS growth estimate for the Zacks Savings and Loan industry appears promising. The group’s mean estimate of long-term (3-5 years) EPS growth rate has been mounting since the beginning of 2018 to reach the current level of 11.28%. This compares favorably with the Zacks S&P 500 Composite’s figure of 9.82%.
Mean Estimate of Long-Term EPS Growth Rate
In fact, the basis of this long-term EPS growth could be the top-line recovery that the industry participants have been showing since the beginning of 2014.
Another important indication of a solid long-term prospect is the improvement in the group’s return on equity (ROE), which is a key metric for evaluating finance stocks.
Though savings and loan stocks will likely continue benefiting from a favorable operating environment, stabilizing housing market and increasing consumer income, rising rates may deter these positives to some extent.
However, keeping the long-term growth prospects in mind, investors could take advantage of the cheap valuation and bet on a few savings and loan stocks that have a strong earnings outlook.
5 Savings and Loan Stocks to Bet On
Great Southern Bancorp, Inc. (GSBC - Free Report) : The stock of this Springfield, MO-based bank has gained 13.8% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised 5.2% upward over the last 60 days. The stock currently sports Zacks Rank #1 (Strong Buy). (You can see the complete list of today’s Zacks #1 Rank stocks here)
Price and Consensus: GSBC
Banner Corporation (BANR - Free Report) : The consensus EPS estimate for this Walla Walla, WA-based bank has moved 5.6% higher for the current year, over the last 60 days. This Zacks Rank #1 stock has rallied 13.2% over the past year.
Price and Consensus: BANR
Riverview Bancorp Inc (RVSB - Free Report) : The stock of Vancouver, WA-based bank has risen 22.6% over the past year. The consensus EPS estimate for the current year has been revised 10.8% upward over the last 60 days. The stock currently carries a Zacks Rank #2 (Buy).
Price and Consensus: RVSB
First Defiance Financial Corp. (FDEF - Free Report) : The stock of this Defiance, OH-based bank has gained 27.2% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised 1.8% upward over the last 60 days. The stock currently carries a Zacks Rank #2.
Price and Consensus: FDEF
Northwest Bancshares, Inc. (NWBI - Free Report) : The consensus EPS estimate for this Warren, PA-based bank has moved 2% higher for the current year, over the last 60 days. This Zacks Rank #2 stock has rallied 11.3% over the past year.
Price and Consensus: NWBI
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