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The Zacks Savings and Loan industry is expected to benefit from the Federal Reserve’s efforts to tame inflation. Aggressive interest rate hikes will drive net interest margins (NIM) and net interest income (NII) for industry participants, providing much-needed support. This, along with loan growth, points toward a booming period for the industry.
Focus on efficiency improvements, digitization efforts and a flurry of consolidations to remain relevant will help companies like TFS Financial Corporation (TFSL - Free Report) , Provident Financial Services, Inc. (PFS - Free Report) and Great Southern Bancorp (GSBC - Free Report) to boast a strong comeback from the pandemic-led disruptions and near-zero interest rates.
Industry Description
The Zacks Savings and Loan (S&L) 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. 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
Aggressive Rate Hikes Brighten Macro Picture: The Federal Reserve has been taking an aggressive monetary policy stance to tame the raging inflation by raising interest rates. So far this year, four hikes by the Fed have increased interest rates 2.25% in aggregate. Such moves will support S&L’s top-line growth. With further rate hikes on the horizon in the ongoing year, companies are likely to realize huge benefits, with climbing NIM and NII. This, along with decent economic growth, robust loan demand, increased asset yields will likely make up for slippages in the past two years for rate-sensitive companies.
Increasing Consolidations to be a Catalyst: Industry players gained traction by marketing themselves as community-focused home-lending specialists to appeal to consumers wary of large multi-state banking conglomerates. At present, when banks face continued competitive challenges from non-traditional banking service providers and rapid innovations in the financial technology space, companies are trying to improve the revenue mix and market visibility through acquisitions despite the stiff regulations. Such strategic mergers and acquisitions are poised to support asset growth for industry participants.
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 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' customer experience and operational efficiency 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 #21, which places it in the top 8% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform 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. The industry's earnings estimates for the current year have been revised 9.8% upward since September 2021.
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 Outpaces Sector and the S&P 500
The Zacks Savings and Loan Industry, a 29-stock group within the broader Zacks Finance Sector, has outpaced the S&P 500 and its sector over the past year.
The stocks in the industry have collectively declined 7%, whereas the S&P 500 Index has fallen 10.3%. In the same period, the Zacks Finance Sector has slid 9.8%.
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 1.39X, below the median level of 1.44X over the past five years. This compares with the highest level of 1.73X and the lowest level of -185.56X 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 10.46X and the median level is 9.78X.
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 current trailing 12-month P/TBV of 4.54X is above the Zacks Savings and Loan industry's ratio.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
3 Lucrative Savings and Loan Stocks Poised to Outshine
Provident Financial: It is the holding company for Provident Bank, which offers a variety of financial products and services through its branch network across northern and central New Jersey, as well as Pennsylvania and Queens County in New York.
In the second quarter, the company reported record quarterly revenue, strong commercial loan growth, NIM expansion, and stable funding costs. Going forward, the company is well-poised for loan growth, as reflected in its loan pipeline. As of Jun 30, 2022, PFS’s loan pipeline totaled $1.43 billion, with a weighted average interest rate of 4.98%. Its organic asset growth strategy will be supported by a solid core deposit funding base.
As the company invests excess liquidity and cash flow from investment securities to higher-yielding loans, its NIM is poised to climb. Efforts to manage operating expenses and investments in new technologies offer scope for long-term growth.
The company presently sports a Zacks Rank of 1 (Strong Buy). The Zacks Consensus Estimate for PFS’s 2022 and 2023 earnings is pegged at $2.27 and $2.52, respectively. These indicate 3.6% and 11.2% year-over-year growth. Revenues for 2022 and 2023 are expected to improve 8.1% and 8.9%. Shares of the company have gained 3.4% in the past year.
Great Southern: Headquartered in Springfield, MO, Great Southern offers a broad range of banking services through 93 retail banking centers.
The company’s gross loans witnessed an increasing trend in the first half of the year. This drove NII growth as well. Going forward, GSBC’s average earning-asset yield is expected to increase, as a significant portion of the company’s loans is indexed to LIBOR and prime rates. This will also lead to higher interest income in the rising interest rate backdrop.
Great Southern focuses on commercial and residential real estate loans. With commercial activity remaining strong, commercial real estate loan growth is expected to aid overall lending activity for the company. Also, given the robust credit quality, loan loss provisioning is anticipated to be low.
The company also continues to enhance shareholder value through capital deployment activities. It has increased its dividend every year since 2013. In second-quarter 2022, it declared a dividend of 40 cents, representing an 11% sequential increase. Great Southern repurchased around 849,000 shares at an average price of $59.32 per share in the first half of 2022 and had around 372,000 shares available in its stock repurchase authorization.
The company presently sports a Zacks Rank of 1. The Zacks Consensus Estimate for GSBC’s 2022 and 2023 earnings improved 10.8% and 10.4%, respectively, over the last 60 days. Its 2022 and 2023 earnings are expected to witness 9.3% and 7.1% year-over-year growth on higher revenues. The company's shares have climbed 11.9% over the past year.
Price and Consensus: GSBC
Image Source: Zacks Investment Research
TFS Financial: This is the holding company for Third Federal Savings and Loan Association of Cleveland, offering retail consumer banking products and services, including real estate mortgage lending and refinancing, as well as home construction lending.
While the company’s growth has been hindered in the past two years, the rising interest and mortgage rates are driving portfolio yields. Thus, its NIM is expected to continue increasing. NII increased 10.1% to $191.9 million for the nine months ended Jun 30, 2022. Growth in the residential loan portfolio and higher interest rates will drive NII in the upcoming period.
The company presently carries a Zacks Rank of 2 (Buy). The Zacks Consensus Estimate for TFSF’s fiscal 2022 and 2023 earnings is expected to witness a year-over-year decline of 10.3% and a rise of 15.4%. The company's shares have climbed 4.7% over the past three months.
Price and Consensus: TFSL
Image Source: Zacks Investment Research
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3 Stellar Savings & Loan Stocks to Buy Amid Fed's Rate Hikes
The Zacks Savings and Loan industry is expected to benefit from the Federal Reserve’s efforts to tame inflation. Aggressive interest rate hikes will drive net interest margins (NIM) and net interest income (NII) for industry participants, providing much-needed support. This, along with loan growth, points toward a booming period for the industry.
Focus on efficiency improvements, digitization efforts and a flurry of consolidations to remain relevant will help companies like TFS Financial Corporation (TFSL - Free Report) , Provident Financial Services, Inc. (PFS - Free Report) and Great Southern Bancorp (GSBC - Free Report) to boast a strong comeback from the pandemic-led disruptions and near-zero interest rates.
Industry Description
The Zacks Savings and Loan (S&L) 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. 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
Aggressive Rate Hikes Brighten Macro Picture: The Federal Reserve has been taking an aggressive monetary policy stance to tame the raging inflation by raising interest rates. So far this year, four hikes by the Fed have increased interest rates 2.25% in aggregate. Such moves will support S&L’s top-line growth. With further rate hikes on the horizon in the ongoing year, companies are likely to realize huge benefits, with climbing NIM and NII. This, along with decent economic growth, robust loan demand, increased asset yields will likely make up for slippages in the past two years for rate-sensitive companies.
Increasing Consolidations to be a Catalyst: Industry players gained traction by marketing themselves as community-focused home-lending specialists to appeal to consumers wary of large multi-state banking conglomerates. At present, when banks face continued competitive challenges from non-traditional banking service providers and rapid innovations in the financial technology space, companies are trying to improve the revenue mix and market visibility through acquisitions despite the stiff regulations. Such strategic mergers and acquisitions are poised to support asset growth for industry participants.
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 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' customer experience and operational efficiency 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 #21, which places it in the top 8% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform 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. The industry's earnings estimates for the current year have been revised 9.8% upward since September 2021.
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 Outpaces Sector and the S&P 500
The Zacks Savings and Loan Industry, a 29-stock group within the broader Zacks Finance Sector, has outpaced the S&P 500 and its sector over the past year.
The stocks in the industry have collectively declined 7%, whereas the S&P 500 Index has fallen 10.3%. In the same period, the Zacks Finance Sector has slid 9.8%.
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 1.39X, below the median level of 1.44X over the past five years. This compares with the highest level of 1.73X and the lowest level of -185.56X 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 10.46X and the median level is 9.78X.
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 current trailing 12-month P/TBV of 4.54X is above the Zacks Savings and Loan industry's ratio.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
3 Lucrative Savings and Loan Stocks Poised to Outshine
Provident Financial: It is the holding company for Provident Bank, which offers a variety of financial products and services through its branch network across northern and central New Jersey, as well as Pennsylvania and Queens County in New York.
In the second quarter, the company reported record quarterly revenue, strong commercial loan growth, NIM expansion, and stable funding costs. Going forward, the company is well-poised for loan growth, as reflected in its loan pipeline. As of Jun 30, 2022, PFS’s loan pipeline totaled $1.43 billion, with a weighted average interest rate of 4.98%. Its organic asset growth strategy will be supported by a solid core deposit funding base.
As the company invests excess liquidity and cash flow from investment securities to higher-yielding loans, its NIM is poised to climb. Efforts to manage operating expenses and investments in new technologies offer scope for long-term growth.
The company presently sports a Zacks Rank of 1 (Strong Buy). The Zacks Consensus Estimate for PFS’s 2022 and 2023 earnings is pegged at $2.27 and $2.52, respectively. These indicate 3.6% and 11.2% year-over-year growth. Revenues for 2022 and 2023 are expected to improve 8.1% and 8.9%. Shares of the company have gained 3.4% in the past year.
You can see the complete list of today's Zacks #1 Rank stocks here.
Price and Consensus: PFS
Image Source: Zacks Investment Research
Great Southern: Headquartered in Springfield, MO, Great Southern offers a broad range of banking services through 93 retail banking centers.
The company’s gross loans witnessed an increasing trend in the first half of the year. This drove NII growth as well. Going forward, GSBC’s average earning-asset yield is expected to increase, as a significant portion of the company’s loans is indexed to LIBOR and prime rates. This will also lead to higher interest income in the rising interest rate backdrop.
Great Southern focuses on commercial and residential real estate loans. With commercial activity remaining strong, commercial real estate loan growth is expected to aid overall lending activity for the company. Also, given the robust credit quality, loan loss provisioning is anticipated to be low.
The company also continues to enhance shareholder value through capital deployment activities. It has increased its dividend every year since 2013. In second-quarter 2022, it declared a dividend of 40 cents, representing an 11% sequential increase. Great Southern repurchased around 849,000 shares at an average price of $59.32 per share in the first half of 2022 and had around 372,000 shares available in its stock repurchase authorization.
The company presently sports a Zacks Rank of 1. The Zacks Consensus Estimate for GSBC’s 2022 and 2023 earnings improved 10.8% and 10.4%, respectively, over the last 60 days. Its 2022 and 2023 earnings are expected to witness 9.3% and 7.1% year-over-year growth on higher revenues. The company's shares have climbed 11.9% over the past year.
Price and Consensus: GSBC
Image Source: Zacks Investment Research
TFS Financial: This is the holding company for Third Federal Savings and Loan Association of Cleveland, offering retail consumer banking products and services, including real estate mortgage lending and refinancing, as well as home construction lending.
While the company’s growth has been hindered in the past two years, the rising interest and mortgage rates are driving portfolio yields. Thus, its NIM is expected to continue increasing. NII increased 10.1% to $191.9 million for the nine months ended Jun 30, 2022. Growth in the residential loan portfolio and higher interest rates will drive NII in the upcoming period.
The company presently carries a Zacks Rank of 2 (Buy). The Zacks Consensus Estimate for TFSF’s fiscal 2022 and 2023 earnings is expected to witness a year-over-year decline of 10.3% and a rise of 15.4%. The company's shares have climbed 4.7% over the past three months.
Price and Consensus: TFSL
Image Source: Zacks Investment Research