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3 Savings & Loan Stocks to Watch Amid High Interest Rate
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The Zacks Savings and Loan industry continues to be caught up in the high-rate environment as increased funding costs continue to put pressure on industry players’ net interest income (NII). Higher provisions due to weakening asset quality are also a major near-term concern.
A stable deposit base and focus on operational efficiency will help companies like Citizens Financial Group, Inc. (CFG - Free Report) , WSFS Financial Corporation (WSFS - Free Report) , and HomeStreet, Inc. (HMST - Free Report) to navigate any crisis in the industry.
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 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
High Interest Rate to Erode Profitability: The Federal Reserve’s aggressive monetary policy tightening since March 2022 led the current rates to a 23-year high of 5.25-5.5%. The industry players are less likely to witness any significant improvement in NII going forward.
The stabilizing macroeconomic backdrop, along with the expectations of the Fed easing interest rates later this year, will offer some support to the lending scenario. The demand for loans is likely to tick up as borrowers get used to the high interest rate environment.
While industry players are witnessing stable deposit balances, adverse impacts from prolonged higher rates, leading to high deposit costs, will keep hampering banks' profitability.
Weakening Asset Quality: High interest rates have affected the credit quality of the commercial loan category, making loan refinancing challenging. This has increased the financial risks for many industry players and also affected their credit quality. Given the expectations of an economic slowdown, industry players are building huge provisions to counter any fallout. While conservative lending policy and the resilience of borrowers helped banks to keep their asset quality manageable, several metrics have started reaching pre-pandemic levels.
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. 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 #190, which places it in the bottom 24% 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 dismal 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 a bleak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for 2024 have moved 39.2% downward.
Before we present a few stocks that you may want to keep an eye on, let us 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 has widely underperformed the Zacks Finance Sector and the S&P 500 composite over the past year.
The stocks in the industry have collectively gained 0.6%, whereas the S&P 500 Index has risen 29.4%. In the same period, the Zacks Finance Sector has grown 23.5%.
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 from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 1.25X, below the median level of 1.37X over the past five years.
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 15.32X and the median level is 13.68X.
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. 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 4.23X 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 Keep on Your Radar
Citizens Financial: Headquartered in Providence, RI, Citizens Financial offers retail and commercial banking products and services to individuals, institutions, and companies. Its long-term strategy involves growth in wealth management offerings, improvement of capabilities in the high-net-worth segment, and expansion into key markets. The company plans to open five-six private banking offices throughout 2024. Initially, the offices will be opened in New York City, Boston, Florida, and California.
The lender exhibits a healthy loan and deposit base. The loans and leases and deposits recorded a CAGR of 6.3% and 6.4%, respectively, over the last three years (2020–2023). The uptrend persisted for total deposits in the first quarter of 2024 on the back of growth in retail and private banks.
CFG presently carries a Zacks Rank of 3. It has a market capitalization of $16.69 billion. The Zacks Consensus Estimate for the company’s current-year earnings per share is pegged at $3.16.
Revenues for 2024 are expected to be $7.89 billion. The company’s shares have increased 9% in the past year.
Image Source: Zacks Investment Research
WSFS Financial: This Wilmington, DE-based multi-billion-dollar financial services company with $20.6 billion in assets on its balance sheet and $80.5 billion in assets under management and administration as of Mar 31, 2024. WSFS operates from 114 offices across Pennsylvania, Delaware, New Jersey, Florida, Nevada, and Virginia. It provides comprehensive financial services, including commercial banking, treasury management, consumer banking, and trust and wealth management services.
The company is ranked sixth in deposits for the fifth largest MSA depository in the United States. Its relationship-based banking generates resilient deposits, high margins, and fee opportunities.
Its 2024 outlook seems encouraging. Management expects mid-single-digit loan growth and low-single-digit deposit growth. Also, net interest margin is expected to be in the range of 3.80-3.90%. Fee revenues are expected to rise in the double-digit range, whereas the efficiency ratio is projected to be 60%.
WSFS presently carries a Zacks Rank of 3 (Hold). It has a market capitalization of $2.82 billion. The Zacks Consensus Estimate for the company’s current-year earnings is pegged at $4.27, indicating a 6.2% year-over-year decline. Revenues for 2024 are expected to be $1.02 billion. Shares of the company have gained 9% in the past year.
Image Source: Zacks Investment Research
HomeStreet: This Seattle-based diversified commercial & consumer bank serves customers throughout the western United States with total assets of $9.5 billion. The company is largely engaged in commercial banking, mortgage banking, and consumer/retail banking activities, serving customers primarily in the Western United States.
The company’s loans have witnessed a CAGR of 7.3% from 2019 to 2023, with the rising trend continuing in the first quarter of 2024. Moreover, NII has witnessed a CAGR of 5.9% from 2019 to 2022.
Last month, HomeStreet announced the approval of its merger with FirstSun Capital Bancorp. Both companies entered into a merger agreement in January 2024. Once completed, the merger will result in a leading regional bank with $17 billion in total assets and 129 branch locations in some of the most desirable markets in the United States. The expanded footprint complements the latter’s presence in the Southwest's high-growth markets, as well as HomeStreet's strong foothold in Southern California, Hawaii, and other major Pacific Northwest locations.
HMST presently carries a Zacks Rank of 2 (Buy). It has a market capitalization of $226.86 million. The Zacks Consensus Estimate for the company’s current-year loss per share is pegged at 75 cents.
Image: Bigstock
3 Savings & Loan Stocks to Watch Amid High Interest Rate
The Zacks Savings and Loan industry continues to be caught up in the high-rate environment as increased funding costs continue to put pressure on industry players’ net interest income (NII). Higher provisions due to weakening asset quality are also a major near-term concern.
A stable deposit base and focus on operational efficiency will help companies like Citizens Financial Group, Inc. (CFG - Free Report) , WSFS Financial Corporation (WSFS - Free Report) , and HomeStreet, Inc. (HMST - Free Report) to navigate any crisis in the industry.
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 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
High Interest Rate to Erode Profitability: The Federal Reserve’s aggressive monetary policy tightening since March 2022 led the current rates to a 23-year high of 5.25-5.5%. The industry players are less likely to witness any significant improvement in NII going forward.
The stabilizing macroeconomic backdrop, along with the expectations of the Fed easing interest rates later this year, will offer some support to the lending scenario. The demand for loans is likely to tick up as borrowers get used to the high interest rate environment.
While industry players are witnessing stable deposit balances, adverse impacts from prolonged higher rates, leading to high deposit costs, will keep hampering banks' profitability.
Weakening Asset Quality: High interest rates have affected the credit quality of the commercial loan category, making loan refinancing challenging. This has increased the financial risks for many industry players and also affected their credit quality. Given the expectations of an economic slowdown, industry players are building huge provisions to counter any fallout. While conservative lending policy and the resilience of borrowers helped banks to keep their asset quality manageable, several metrics have started reaching pre-pandemic levels.
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. 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 #190, which places it in the bottom 24% 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 dismal 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 a bleak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for 2024 have moved 39.2% downward.
Before we present a few stocks that you may want to keep an eye on, let us 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 has widely underperformed the Zacks Finance Sector and the S&P 500 composite over the past year.
The stocks in the industry have collectively gained 0.6%, whereas the S&P 500 Index has risen 29.4%. In the same period, the Zacks Finance Sector has grown 23.5%.
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 from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 1.25X, below the median level of 1.37X over the past five years.
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 15.32X and the median level is 13.68X.
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. 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 4.23X is above the Zacks Savings and Loan industry's ratios.
Price-to-Tangible Book Ratio (TTM)
3 Savings and Loan Stocks to Keep on Your Radar
Citizens Financial: Headquartered in Providence, RI, Citizens Financial offers retail and commercial banking products and services to individuals, institutions, and companies. Its long-term strategy involves growth in wealth management offerings, improvement of capabilities in the high-net-worth segment, and expansion into key markets. The company plans to open five-six private banking offices throughout 2024. Initially, the offices will be opened in New York City, Boston, Florida, and California.
The lender exhibits a healthy loan and deposit base. The loans and leases and deposits recorded a CAGR of 6.3% and 6.4%, respectively, over the last three years (2020–2023). The uptrend persisted for total deposits in the first quarter of 2024 on the back of growth in retail and private banks.
CFG presently carries a Zacks Rank of 3. It has a market capitalization of $16.69 billion. The Zacks Consensus Estimate for the company’s current-year earnings per share is pegged at $3.16.
Revenues for 2024 are expected to be $7.89 billion. The company’s shares have increased 9% in the past year.
WSFS Financial: This Wilmington, DE-based multi-billion-dollar financial services company with $20.6 billion in assets on its balance sheet and $80.5 billion in assets under management and administration as of Mar 31, 2024. WSFS operates from 114 offices across Pennsylvania, Delaware, New Jersey, Florida, Nevada, and Virginia. It provides comprehensive financial services, including commercial banking, treasury management, consumer banking, and trust and wealth management services.
The company is ranked sixth in deposits for the fifth largest MSA depository in the United States. Its relationship-based banking generates resilient deposits, high margins, and fee opportunities.
Its 2024 outlook seems encouraging. Management expects mid-single-digit loan growth and low-single-digit deposit growth. Also, net interest margin is expected to be in the range of 3.80-3.90%. Fee revenues are expected to rise in the double-digit range, whereas the efficiency ratio is projected to be 60%.
WSFS presently carries a Zacks Rank of 3 (Hold). It has a market capitalization of $2.82 billion. The Zacks Consensus Estimate for the company’s current-year earnings is pegged at $4.27, indicating a 6.2% year-over-year decline. Revenues for 2024 are expected to be $1.02 billion. Shares of the company have gained 9% in the past year.
HomeStreet: This Seattle-based diversified commercial & consumer bank serves customers throughout the western United States with total assets of $9.5 billion. The company is largely engaged in commercial banking, mortgage banking, and consumer/retail banking activities, serving customers primarily in the Western United States.
The company’s loans have witnessed a CAGR of 7.3% from 2019 to 2023, with the rising trend continuing in the first quarter of 2024. Moreover, NII has witnessed a CAGR of 5.9% from 2019 to 2022.
Last month, HomeStreet announced the approval of its merger with FirstSun Capital Bancorp. Both companies entered into a merger agreement in January 2024. Once completed, the merger will result in a leading regional bank with $17 billion in total assets and 129 branch locations in some of the most desirable markets in the United States. The expanded footprint complements the latter’s presence in the Southwest's high-growth markets, as well as HomeStreet's strong foothold in Southern California, Hawaii, and other major Pacific Northwest locations.
HMST presently carries a Zacks Rank of 2 (Buy). It has a market capitalization of $226.86 million. The Zacks Consensus Estimate for the company’s current-year loss per share is pegged at 75 cents.
Revenues for 2024 are expected to be $176 million. Shares of the company have gained 9% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.