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Near-Term Prospects Appear Bleak 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 the refinancing of residential mortgages. Lesser regulatory supervisions and an anticipated improvement in the housing market owing to low mortgage rates and a reopening economy will likely keep driving the industry’s growth in the upcoming quarters too. Nonetheless, continued impact of the COVID-19 outbreak is likely to weigh on business activities globally, which in turn, might thwart demand for loans.
     
  • The Fed’s slashing of interest rates to near zero this March to shield the U.S. economy from the coronavirus mayhem has spurred demand in loans, as lower rates attract consumers. Particularly, strong commercial and industrial (C&I) along with commercial real estate loan growth is anticipated further, partly offset by weakness in revolving home equity, consumer and residential real estate loans, along with rising deposit costs. Notably, lower consumer spending on the pandemic’s impact has thwarted consumer loan growth. Nevertheless, low rates are expected to continue to hamper net interest margin for these companies to some extent.
     
  • For the later half of 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, these companies will need to ramp-up transition into diligently-focused, technology-driven and flexibly-operating institutions, in order to remain competitive and reap profits in the rapidly-evolving market. Moreover, the industry is exposed to heightening competition with commercial banks, credit unions and other non-bank organizations that offer similar financial services in a digital way.

 

Zacks Industry Rank Indicates Gloomy 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 #166, which places it at the bottom 34% 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. Remarkably, the industry’s earnings estimates for the current year have been revised 46.2% downward since July 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 Zacks Finance Sector, has underperformed the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively declined 26.4%, the S&P 500 Composite gained 4.1%, while the Zacks Finance Sector has lost 17%.

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 1.06X, below the median level of 1.46X, over the past five years. This compares with the highest level of 9.88X and lowest level of 0.84X 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 12.21X and the median level is 9.42X.


Price-to-Tangible Book Ratio (TTM)


The Zacks Finance sector’s trailing 12-month P/TBV ratio of 3.22X and the median level of 3.48X 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 corporate loans, intensifying competition from similar companies might deter these positives to some extent. Apart from these, a downtrend in consumer spending on the coronavirus pandemic-led crisis 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 one stock with a Zacks Rank #1 (Strong Buy) and three 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

Meta Financial Group, Inc. (CASH - Free Report) : Shares of this Sioux Falls, SD-based bank have appreciated 16.4%, in the last three months. The consensus EPS estimate for the current fiscal year has remained unchanged, over the last 60 days. The stock currently flaunts a Zacks Rank of 1.


Price and Consensus: CASH


Meridian Bancorp, Inc. (EBSB - Free Report) : The stock of this Peabody, MA-based bank has gained 10.9% in three months’ time. The Zacks Consensus Estimate for the ongoing-year EPS has remained unrevised in 60 days’ time. The stock currently carries a Zacks Rank of 2.


Price and Consensus: EBSB


Brookline Bancorp, Inc. (BRKL - Free Report) : Shares of this Boston, MA-based bank have depreciated 6.7%, in three months’ time. The consensus EPS estimate for the current year moved up 12.9%, over the last 60 days. The stock holds a Zacks Rank #2, at present.


Price and Consensus: BRKL


ESSA Bancorp, Inc. (ESSA - Free Report) : The fiscal 2020 consensus EPS estimate for this Stroudsburg, PA-based bank has moved 5.5% north, in the past 60 days. This Zacks Rank #2 stock has rallied 16.6% in the last three months.


Price and Consensus: ESSA


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