We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
The Zacks Savings and Loan industry is suffering from contagion fears from the collapse of two banks. Moreover, the pace of rate hikes has not only increased funding costs but has also raised concerns regarding a deceleration in economic growth. This, along with tightening lending standards across the board, is likely to affect lending activity.
Nonetheless, focus on efficiency improvements, digitization efforts and acquisitions to remain relevant will help companies like New York Community Bancorp, Inc. (NYCB - Free Report) , Banner Corporation (BANR - Free Report) and Berkshire Hills Bancorp, Inc. (BHLB - Free Report) to navigate through any crisis 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 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 to Increase Funding Costs, Contagion Risk: The Fed’s ultra-aggressive monetary policy over the past year led the rates to reach a 15-year-high level. While rising rates are generally a boon for banks, lifting NIM and NII, the pace of rate hikes has increased concerns regarding the economy. Faster rate hikes after a prolonged period of low rates have resulted in the collapse of two S&P 500 banks — Silicon Valley Bank and Signature Bank. This raised questions about the soundness and resilience of the U.S. banking system, along with contagion fears.
The central bank has made efforts to limit a wider banking crisis. Also, New York Community Bancorp acquired Signature Bank’s $38-billion assets and assumed $36 billion of liabilities. Yet, other banks with unrealized losses or uninsured depositors could be at risk. Also, industry participants are facing higher funding costs due to high interest rates, increased competition and runoff of low-cost deposits. This may compress NIMs in the upcoming period.
Near-Term Recession Risk to Weaken Lending Activity: The pace of rate hikes can translate into a deceleration in economic growth. Notably, the Fed’s aggressive monetary policy has intensified recession fears, with the Fed’s Summary of Economic Projections announced in March 2023, indicating that the U.S. economy will slow down considerably this year, with just 0.4% growth. A rising rate environment, along with inflationary pressures and supply-chain issues, will likely dampen loan demand as consumers will try to avoid taking loans at higher rates. Banks have also tightened their lending standards, which can weigh on new loan originations.
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 Bleak Prospects
The Zacks Savings and Loan industry currently carries a Zacks Industry Rank #241, which places it in the bottom 4% 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 bleak near-term prospects. 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 bottom 50% of the Zacks-ranked industries is a result of discouraging 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 7.7% upward since March 2022.
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 Underperforms Sector and the S&P 500
The Zacks Savings and Loan Industry, a 26-stock group within the broader Zacks Finance Sector, has underperformed the S&P 500 and its sector over the past year.
The stocks in the industry have collectively lost 30.5%, whereas the S&P 500 Index has fallen 15.2%. In the same period, the Zacks Finance Sector has declined 19.8%.
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 1.19X, below the median level of 1.40X over the past five years. This compares with the highest level of 1.66X and the lowest level of -96.58X 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 9.89X and the median level is 9.92X.
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 4.22X 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 Watch
Banner: It is a $15.83-billion bank holding company that operates one commercial bank in four Western states through a network of branches offering deposit services and business, commercial real estate, residential, construction, agricultural and consumer loans.
The company has a well-diversified loan portfolio and decent loan origination commitments as of the fourth-quarter 2022 end. The company has been making efforts to reduce deposit costs and grow core deposits in a bid to protect net interest margins.
A conservative $3.94-billion investment portfolio is another positive for BANR. This portfolio is a diversified mix of asset types, with 80% of investments consisting of Agency MBS or CMO or AAA-rated securities. Also, the company undertook a bank-wide initiative, Banner Forward, to enhance revenue growth and reduce operating costs. By focusing on accelerating growth in commercial banking and advancing technology strategies, the company’s revenues are expected to benefit in 2023.
Banner presently carries a Zacks Rank of 2 (Buy). The Zacks Consensus Estimate for BANR’s 2023 earnings is pegged at $6.57, indicating 15.5% year-over-year growth. Revenues for 2023 are expected to improve 9.1%. Shares of the company have lost 11.8% in the past year.
Berkshire Hills: Headquartered in Boston, BHLB offers a wide range of financial solutions through its consumer banking, commercial banking and wealth management divisions. It has $11.7 billion in assets and a community-based footprint consisting of 100 financial centers in Massachusetts, New York, Vermont, Connecticut and Rhode Island.
In 2022, the company reported adjusted earnings per share of $2.19, indicating 30% year-over-year growth, on adjusted revenues of $416 million, which grew 9%. The balance sheet position as of Dec 31, 2022, was decent, with average loan growth of 5%. A strong liquidity position enabled the company to return $150 million to shareholders in the forms of dividends and share repurchases. The company announced a $50-million share repurchase program for 2023.
Berkshire Hills is developing an online and mobile experience for consumers and business banking customers. Optimization efforts include 22 branch consolidations and real estate rationalization, which are expected to result in annual expense saves.
BHLB presently carries a Zacks Rank of 2. The Zacks Consensus Estimate for its 2023 and 2024 earnings is pegged at $2.45 and $2.63, indicating 11.9% and 7.4% year-over-year growth. Revenues for 2023 and 2024 are expected to improve 12.7% and 1.7%. Shares of the company have lost 15.2% in the past year.
Price and Consensus: BHLB
Image Source: Zacks Investment Research
New York Community: Headquartered in Hicksville, NY, the company provides traditional and non-traditional products and services, and access to multiple service channels, including online banking and mobile banking.
NYCB has a strong balance sheet. Deposits saw a three-year (2020-2022) compound annual growth rate (CAGR) of 34.5%, while net loans witnessed a CAGR of 26.6% during the same period. It closed the acquisition of Flagstar Bancorp, Inc. on Dec 1, 2022. With this, the combined entity became the 24th largest regional bank (based on total assets) in the country.Efforts to expand into the Banking-as-a-Service (BaaS) space will strengthen its balance sheet.
The acquisition of Signature Bank’s assets will help it become a diversified full-service commercial bank. The company plans to use cash to pay a substantial amount of its wholesale borrowing. This, along with the addition of low-cost deposits, will reduce funding costs. Hence, the NIM is expected to expand. The acquisition is expected to be significantly accretive to earnings per share, which are expected to increase 20%.
NYCB presently carries a Zacks Rank of 3 (Hold). The Zacks Consensus Estimate for 2024 earnings is pegged at $1.30, indicating 11.9% year-over-year growth. Revenues for 2023 and 2024 are expected to improve 91.7% and 10.8%. Shares of the company have lost 20.6% in the past year.
Price and Consensus: NYCB
Image Source: Zacks Investment Research
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
3 Savings & Loan Stocks to Watch Despite SVB, SBNY Fiasco
The Zacks Savings and Loan industry is suffering from contagion fears from the collapse of two banks. Moreover, the pace of rate hikes has not only increased funding costs but has also raised concerns regarding a deceleration in economic growth. This, along with tightening lending standards across the board, is likely to affect lending activity.
Nonetheless, focus on efficiency improvements, digitization efforts and acquisitions to remain relevant will help companies like New York Community Bancorp, Inc. (NYCB - Free Report) , Banner Corporation (BANR - Free Report) and Berkshire Hills Bancorp, Inc. (BHLB - Free Report) to navigate through any crisis 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 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 to Increase Funding Costs, Contagion Risk: The Fed’s ultra-aggressive monetary policy over the past year led the rates to reach a 15-year-high level. While rising rates are generally a boon for banks, lifting NIM and NII, the pace of rate hikes has increased concerns regarding the economy. Faster rate hikes after a prolonged period of low rates have resulted in the collapse of two S&P 500 banks — Silicon Valley Bank and Signature Bank. This raised questions about the soundness and resilience of the U.S. banking system, along with contagion fears.
The central bank has made efforts to limit a wider banking crisis. Also, New York Community Bancorp acquired Signature Bank’s $38-billion assets and assumed $36 billion of liabilities. Yet, other banks with unrealized losses or uninsured depositors could be at risk. Also, industry participants are facing higher funding costs due to high interest rates, increased competition and runoff of low-cost deposits. This may compress NIMs in the upcoming period.
Near-Term Recession Risk to Weaken Lending Activity: The pace of rate hikes can translate into a deceleration in economic growth. Notably, the Fed’s aggressive monetary policy has intensified recession fears, with the Fed’s Summary of Economic Projections announced in March 2023, indicating that the U.S. economy will slow down considerably this year, with just 0.4% growth. A rising rate environment, along with inflationary pressures and supply-chain issues, will likely dampen loan demand as consumers will try to avoid taking loans at higher rates. Banks have also tightened their lending standards, which can weigh on new loan originations.
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 Bleak Prospects
The Zacks Savings and Loan industry currently carries a Zacks Industry Rank #241, which places it in the bottom 4% 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 bleak near-term prospects. 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 bottom 50% of the Zacks-ranked industries is a result of discouraging 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 7.7% upward since March 2022.
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 Underperforms Sector and the S&P 500
The Zacks Savings and Loan Industry, a 26-stock group within the broader Zacks Finance Sector, has underperformed the S&P 500 and its sector over the past year.
The stocks in the industry have collectively lost 30.5%, whereas the S&P 500 Index has fallen 15.2%. In the same period, the Zacks Finance Sector has declined 19.8%.
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 1.19X, below the median level of 1.40X over the past five years. This compares with the highest level of 1.66X and the lowest level of -96.58X 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 9.89X and the median level is 9.92X.
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 4.22X 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 Watch
Banner: It is a $15.83-billion bank holding company that operates one commercial bank in four Western states through a network of branches offering deposit services and business, commercial real estate, residential, construction, agricultural and consumer loans.
The company has a well-diversified loan portfolio and decent loan origination commitments as of the fourth-quarter 2022 end. The company has been making efforts to reduce deposit costs and grow core deposits in a bid to protect net interest margins.
A conservative $3.94-billion investment portfolio is another positive for BANR. This portfolio is a diversified mix of asset types, with 80% of investments consisting of Agency MBS or CMO or AAA-rated securities. Also, the company undertook a bank-wide initiative, Banner Forward, to enhance revenue growth and reduce operating costs. By focusing on accelerating growth in commercial banking and advancing technology strategies, the company’s revenues are expected to benefit in 2023.
Banner presently carries a Zacks Rank of 2 (Buy). The Zacks Consensus Estimate for BANR’s 2023 earnings is pegged at $6.57, indicating 15.5% year-over-year growth. Revenues for 2023 are expected to improve 9.1%. Shares of the company have lost 11.8% in the past year.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: BANR
Image Source: Zacks Investment Research
Berkshire Hills: Headquartered in Boston, BHLB offers a wide range of financial solutions through its consumer banking, commercial banking and wealth management divisions. It has $11.7 billion in assets and a community-based footprint consisting of 100 financial centers in Massachusetts, New York, Vermont, Connecticut and Rhode Island.
In 2022, the company reported adjusted earnings per share of $2.19, indicating 30% year-over-year growth, on adjusted revenues of $416 million, which grew 9%. The balance sheet position as of Dec 31, 2022, was decent, with average loan growth of 5%. A strong liquidity position enabled the company to return $150 million to shareholders in the forms of dividends and share repurchases. The company announced a $50-million share repurchase program for 2023.
Berkshire Hills is developing an online and mobile experience for consumers and business banking customers. Optimization efforts include 22 branch consolidations and real estate rationalization, which are expected to result in annual expense saves.
BHLB presently carries a Zacks Rank of 2. The Zacks Consensus Estimate for its 2023 and 2024 earnings is pegged at $2.45 and $2.63, indicating 11.9% and 7.4% year-over-year growth. Revenues for 2023 and 2024 are expected to improve 12.7% and 1.7%. Shares of the company have lost 15.2% in the past year.
Price and Consensus: BHLB
Image Source: Zacks Investment Research
New York Community: Headquartered in Hicksville, NY, the company provides traditional and non-traditional products and services, and access to multiple service channels, including online banking and mobile banking.
NYCB has a strong balance sheet. Deposits saw a three-year (2020-2022) compound annual growth rate (CAGR) of 34.5%, while net loans witnessed a CAGR of 26.6% during the same period. It closed the acquisition of Flagstar Bancorp, Inc. on Dec 1, 2022. With this, the combined entity became the 24th largest regional bank (based on total assets) in the country.Efforts to expand into the Banking-as-a-Service (BaaS) space will strengthen its balance sheet.
The acquisition of Signature Bank’s assets will help it become a diversified full-service commercial bank. The company plans to use cash to pay a substantial amount of its wholesale borrowing. This, along with the addition of low-cost deposits, will reduce funding costs. Hence, the NIM is expected to expand. The acquisition is expected to be significantly accretive to earnings per share, which are expected to increase 20%.
NYCB presently carries a Zacks Rank of 3 (Hold). The Zacks Consensus Estimate for 2024 earnings is pegged at $1.30, indicating 11.9% year-over-year growth. Revenues for 2023 and 2024 are expected to improve 91.7% and 10.8%. Shares of the company have lost 20.6% in the past year.
Price and Consensus: NYCB
Image Source: Zacks Investment Research