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3 Top Stocks to Buy From the Stellar Savings & Loan Industry

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The Zacks Savings and Loan industry is expected to fire on all cylinders, with robust economic growth and the recovery in consumer spending levels. This is anticipated to aid loan growth, providing much-needed support.

Further, digitization efforts and a flurry of consolidations in a bid to remain relevant will help companies like Investors Bancorp, Inc. , HomeStreet, Inc. (HMST - Free Report) and West Bancorporation, Inc. (WTBA - Free Report) counter competitions and emerge stronger than a stand-alone institution.

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 the Federal Deposit Insurance Corporation ("FDIC"). They offer high interest rates on savings to attract deposits, enhancing their ability to lend mortgages. Though 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

Loan Growth in the Cards: The macro outlook for the United States is becoming favorable with the reopening of the economy and an increase in business confidence levels. Consumer spending levels are also recovering and might be robust in the upcoming period. Amid such a scenario, an improvement in consumer behavior will boost mortgage, commercial, education and auto loans. This is expected to instill confidence among borrowers and support the loan demand in most loan categories. Therefore, loan growth despite low rates is likely to support the industry participants’ net interest income and margin to some extent.

Consolidation Wave at Peak: Previously, industry players gained traction by marketing themselves as community-focused home-lending specialists to appeal to consumers wary of large multi-state banking conglomerates. However, continued competitive challenges from non-traditional banking services, rabid innovations in financial technology, and the potential for stiff regulations are making it difficult for companies to operate as stand-alone institutions. This is compelling industry constituents to resort to consolidations to keep their heads afloat. Also, the present challenging operating backdrop is keeping the saving and loan industry on its toes.

Digitization Initiatives to Come as a Breather: Numerous challenges, including legacy technologies and an unbalanced customer base, have cropped up for savings and loan associations. Thus, these companies have been making efforts to ramp up the transition into diligently focused, technology-driven and flexibly 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' operations and enhance market share over time.

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 #30, which places it in the top 12% 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 a 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 56.8% upward since December 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 the valuation picture.

Industry Outperforms Sector and the S&P 500

The Zacks Savings and Loan Industry, a 33-stock group within the broader Zacks Finance Sector, has outperformed the S&P 500 and its sector over the past year.

While the stocks in the industry have collectively rallied 26.9%, the S&P 500 Index has gained 23.4%. During the same period, the Zacks Finance Sector has gained 20%.

One-Year Price Performance

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 1.54X, above the median level of 1.52X over the past five years. This compares with the highest level of 10.15X and the lowest level of 0.84X over the same period.

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 17.07X and the median level is 11.37X.

Price-to-Tangible Book Ratio (TTM)

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 4.37X for the same period is above the Zacks Savings and Loan industry's respective ratio.

Price-to-Tangible Book Ratio (TTM)

3 Savings and Loan Stocks Worth Betting on

West Bancorporation: Headquartered in West Des Moines, IA, WTBA focuses on lending, deposit services, and trust services for consumers and small to medium-sized businesses. West Bancorporation has witnessed a decent rise in loans spread across all its markets over the past few quarters.

For the first nine months of 2021, West Bancorporation registered loan growth (exclusive of Paycheck Protection Program or PPP loan activity) of 10.1%. Also, pay downs and pay-offs of classified loans are driving the company's credit quality. Continuation of such trends will lead to robust organic growth.

Efforts to expand presence in Minnesota are anticipated to drive further loan increment, while a focus on commercial and industrial segments has been bolstering strong deposit growth and the treasury management business for WBTA.

West Bancorporation carries a Zacks Rank #2 (Buy) at present. The consensus mark for WTBA's current-year earnings has moved up 2.4% to $3.02 in the past two months. This indicates growth of 52.5% from the year-ago reported figure. Shares of the company have returned 55.6% over the past year.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: WTBA

Investors Bancorp: Headquartered in Short Hills, NJ, ISBC operates through 154 branches throughout New Jersey, New York and Pennsylvania.Investors Bancorp's consumer banking services entail online banking, deposit products, home equity loans, lines of credit and a full set of mortgage loans.

In August, Investors Bancorp closed the acquisition of the eight New Jersey and eastern Pennsylvania branches of Berkshire Bank. The buyout enabled the company to acquire around $630 million of deposits as well as $220 million of consumer and commercial loans. Last month, Investors Bancorp's shareholders approved its planned merger with another industry participant. The acquirer will buy all outstanding shares of Investors Bancorp for a 10% cash and 90% stock combination. This is expected to close in the first half of 2022.

Going forward, loan growth, improvement in funding mix and credit quality will support the company's financials.

Investors Bancorp presently carries a Zacks Rank of 2. The Zacks Consensus Estimate for ISBC's 2021 earnings has moved 1.6% north to $1.27 over the past two months. This indicates year-over-year growth of 35.1%. Shares of the company have climbed 45.3% over the past year.

Price and Consensus: ISBC

HomeStreet: HMST is a diversified commercial and consumer bank headquartered in Seattle, WA, with $7.4 billion in assets as of Sep 30, 2021. HomeStreet has made significant strides to transform itself into a full-scale commercial bank by expanding its market presence in highly attractive metropolitan markets.

The company sold a major chunk of its mortgage business in 2019. Such an evolving business model has helped HMST reduce earnings volatility, given the choppiness in the mortgage market. HomeStreet's revenues from single-family mortgage banking reduced from 26% in third-quarter 2020 to 17% in third-quarter 2021. Given the expectation of a slight decline in origination and gain on sales activities, revenues from mortgage are expected to be an even smaller share of HomeStreet's revenues, going forward.

In third-quarter 2021, the company's NII and NIM were relatively stable at $57.5 million and 3.42%, respectively. HMST also has a highly diversified loan portfolio in terms of product and geography. Management expects 10-15% of loan growth in 2022, primarily driven by higher commercial real estate loan originations. This also corresponds to an increase in NII, which is likely to drive top-line growth.

HomeStreet's 2021 earnings are expected to witness 52.7% year-over-year growth. The Zacks Consensus Estimate for HMST's 2021 earnings improved 1.3% over the last 30 days. This Zacks Rank #2 company's shares have climbed 47.4% over the past year.

Price and Consensus: HMST



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