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Near-Term Prospects Look Gloomy for Savings & Loan Industry

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The Zacks Savings and Loan industry consists of specialized U.S. banks that provide residential mortgages, commercial and industrial mortgages, home equity loans, vehicle loans and other business loans.

These institutions fund mortgages insured by the Federal Deposit Insurance Corporation. Though the firms operate similarly to commercial banks by providing various banking services, such as checking and savings accounts, these are bound to invest 65% of their asset holdings in residential mortgages. Moreover, these firms are locally owned and provide the best rates on mortgages.

Two of the prominent stocks in this industry are Citizens Financial Group, Inc. (CFG - Free Report) and People's United Financial, Inc. (PBCT - Free Report) .

Here are the three major themes in the industry:
 

  • For the last few years, an improving domestic economy and rising demand for residential mortgages have been aiding the U.S. savings and loan industry. Rising income of Americans, along with lower rates, has supported the housing market by fueling demand for refinancing of residential mortgages. Lesser regulatory supervisions and an improving housing market, though at a slow pace, are anticipated to keep driving the industry’s growth in the upcoming quarters too. Nonetheless, the recent COVID-19 outbreak is likely to weigh upon business activities globally, which in turn, might thwart demand for loans.
     
  • The Fed’s rate cuts last year have spurred demand in loans, as lower rates attract consumers. Particularly, strong consumer loan growth in anticipated, partly offset by weakness in revolving home equity, commercial and industrial (C&I) and overall real estate loans, along with rising deposit costs. Nevertheless, the industry is exposed to heightening competition with commercial banks, credit unions and other non-bank organizations that offer similar financial services.
     
  • For 2020 and beyond, multiple challenges will crop up for the savings and loan companies, including legacy technologies and an unbalanced customer base, in the course of undertaking better initiatives for significant growth. Thus, in order to remain competitive and reap profits in the rapidly-evolving market, these companies will need to ramp-up transition into diligently-focused, technology-driven and flexibly-operating institutions.


Zacks Industry Rank Indicates Bleak Prospects

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.

The Zacks Savings and Loan industry currently carries a Zacks Industry Rank #156, which places it at the bottom 39% 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 bottom 50% of the Zacks-ranked industries is a result of bleak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Notably, the industry’s earnings estimates for the current year have been revised 8.6% downward since February 2019.

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 Lags on Shareholder Returns

The Zacks Savings and Loan Industry, a 36-stock group within the broader Finance Sector Sector, has underperformed the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively declined 5.5%, the Zacks S&P 500 Composite and Zacks Finance Sector have rallied 10.3% and 1.4%, respectively.


One-Year Price Performance


Industry’s 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 1.4X, below the median level of 1.46X, over the past five years. This compares with the highest level of 9.89X and lowest level of 1.14X 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 16.1X and the median level is 9.13X.


Price-to-Tangible Book Ratio (TTM)


The Zacks Finance sector’s trailing 12-month P/TBV ratio of 3.1X and the median level of 3.46X for the same period are above the Zacks Savings and Loan industry’s respective ratios.


Price-to-Tangible Book Ratio (TTM)


Bottom Line

Though savings and loan stocks will likely keep benefiting from lower rates, a stabilizing housing market and increasing consumer income, intensifying competition from similar companies might deter these positives to some extent. Apart from these, downtrend in business activities on the drastic spreading of COVID-19 might result in lower demand for loans.

However, keeping the long-term growth prospects in mind, investors can take advantage of the cheap valuation, and bet on a few savings and loan stocks with solid earnings outlooks.

One should particularly consider betting on savings and loan stocks that depict upbeat earnings outlook. We are presenting three stocks with a Zacks Rank #1 (Strong Buy) and one with a Zacks Rank #2 (Buy) that investors may consider betting on.

(You can see the complete list of today’s Zacks #1 Rank stocks here)


4 Savings and Loan Stocks to Bet on

Flushing Financial Corporation (FFIC - Free Report) : The stock of this Uniondale, NY-based bank has lost around 4.9%, in the last six months. The Zacks Consensus Estimate for the ongoing-year EPS has been revised 2.9% upward in 30 days’ time. The stock currently sports a Zacks Rank of 1.


Price and Consensus: FFIC


Investors Bancorp, Inc. (ISBC - Free Report) : Shares of this Short Hills, NJ-based bank have depreciated 5.1%, in six months’ time. The consensus EPS estimate for the current year moved up 2.2%, over the last 30 days. The stock flaunts a Zacks Rank #1, at present.


Price and Consensus: ISBC


ServisFirst Bancshares, Inc. (SFBS - Free Report) : The 2020 consensus EPS estimate for this Birmingham, AL-based bank has moved 2.4% north, in the past 30 days. This Zacks Rank #1 stock has rallied 17.6% in the last six months.


Price and Consensus: SFBS


Citizens Community Bancorp, Inc. (CZWI - Free Report) : Shares of this Eau Claire, WI-based bank have appreciated 7.1%, in the last six months. The consensus EPS estimate for this year has been revised slightly upward, over the last 30 days. The stock currently holds a Zacks Rank of 2.


Price and Consensus: CZWI


5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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