The Zacks Savings and Loan industry is expected to benefit from the Federal Reserve’s interest rate cuts. This is likely to support a decent rise in loan demand. Also, relatively lower rates will stabilize funding costs over time, supporting net interest income (NII) and net interest margin (NIM) expansion.
The digitization of operations and a stable deposit base are anticipated to support industry players in the near term. Thus, some of the industry players like Banner Corporation BANR, HomeStreet, Inc. HMST and Citizens Community Bancorp CZWI are poised to gain from these developments.
Industry Description
The Zacks Savings and Loan industry consists of specialized U.S. banks, which are generally locally owned, focusing 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 July 1, 2019, a ruling lifted the restrictions for institutions insured by the FDIC.
3 Savings & Loan Industry Trends to Watch
Fed Rate Cut to Lower Funding Costs, Aid NII: The Federal Reserve’s aggressive start to monetary policy easing has given a breath of relief to the industry players who were reeling under high funding costs. The Fed lowered the interest rates by 100 basis points (bps) since September 2024 and has indicated two rate cuts for 2025. Declining rates are positives for banks as they will gradually stabilize funding costs, supporting NIM and NII expansion.
Loan Growth in the Cards: With an improving macro outlook for the United States and the Federal Reserve’s interest rate cuts, consumer spending levels are witnessing an increase and might be robust in the upcoming period. With the Fed lowering interest rates, mortgage rates are declining, supporting lending activities.
Per the Freddie Mac report, the 30-year fixed mortgage rate was 6.85% in the week ended Dec. 26, 2024. The mortgage rate hovered around 7% for most of the months in 2024. The United States’ economic growth is expected to continue in 2025, although at a slightly slower pace than in 2024. This, along with interest rate cuts, will gradually lower mortgage rates in the upcoming period. With a gradual decrease in mortgage rates, purchase originations and refinancing activities will likely improve. This is expected to instill confidence among borrowers and support loan demand in most loan categories.
Digital Ramp-Ups to Offer Some Respite: Numerous challenges, including legacy technologies and an unbalanced customer base, have cropped up for savings and loan associations. These 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.
Worsening Asset Quality: Following the COVID-19 outbreak and a subsequent halt in business activities in 2020, most sectors, wherein savings and loan companies provide finance, were hit hard. This raised fears of a deterioration of asset quality for industry players. Nonetheless, support from the administration in the form of stimulus packages and the subsequent re-opening of businesses supported economic growth. This, thus, prevented a substantial rise in delinquency rates for the industry players. However, with current macroeconomic volatility, industry players are building additional reserves to counter any adverse fallout. Though the Fed has lowered interest rates, they are still relatively high. This may curtail consumers’ ability to pay back loans. Thus, industry players are building additional reserves to counter any adverse fallout from unexpected defaults and payment delays. This is leading to a deterioration in industry players’ asset quality and several credit quality metrics have crept up toward the pre-pandemic levels.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Savings and Loan industry currently carries a Zacks Industry Rank #53, which places it in the top 21% of 248 Zacks industries.
The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates upbeat 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.
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 & 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 21.9%, whereas the S&P 500 Index has risen 28%. In the same period, the Zacks Finance Sector has appreciated 24%.
One-Year Price Performance
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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 1.16X, below the median level of 1.16X over the past five years.
The industry is trading at a discount compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 composite is 14.43X and the median level is 13.93X.
Price-to-Tangible Book Ratio (TTM)
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As finance stocks typically have a low P/TB ratio, comparing savings and loan stocks 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 5.26X is way above the Zacks Savings and Loan industry's ratio.
Price-to-Tangible Book Ratio (TTM)
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3 Savings & Loan Stocks Worth Betting On
Banner Corp: It is a $16.2-billion bank holding company that operates a 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, with a rising average yield on loan originations as of the third-quarter 2024 end. It has been making efforts to reduce deposit costs and grow core deposits to protect NIM. A conservative $3.25-billion investment portfolio is another positive for BANR. This portfolio is a diversified mix of asset types, with 79% of investments consisting of Agency MBS, 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, BANR’s revenues are expected to benefit in the upcoming period. As of Sept. 30, 2024, non-performing assets were $45.2 million, or 0.28% of total assets, compared with $26.8 million, or 0.17% of total assets, as of Sept. 30, 2023.
The Zacks Consensus Estimate for Banner Corp’s 2024 earnings indicates an 8.4% year-over-year decline, while that for 2025 earnings suggests a 0.1% year-over-year rise.
BANR has a market capitalization of $2.3 billion. This Zacks Rank #2 (Buy) company's shares have climbed 36.8% over the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: BANR
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HomeStreet: HMST is a diversified commercial and consumer bank headquartered in Seattle, WA, with $9.2 billion in assets as of Sept. 30, 2024. HomeStreet has made significant strides to transform into a full-scale commercial bank by expanding its market presence in highly attractive metropolitan markets.
Recently, HomeStreet’s subsidiary, HomeStreet Bank, sold $990 million worth of its multi-family commercial real estate loans to Bank of America, Corp. This will help it mitigate funding costs and boost profitability. HMST's revenues from single-family multi-loans constituted 15% of total revenues in the third quarter of 2024 and rose 26% from the year-ago period.
Given the expectation of an increase in origination and gain on sales activities, revenues from mortgages are expected to constitute a higher share of HomeStreet's revenues, going forward. During the nine months of 2024, NII declines 31.3% from the year-ago period. HMST also has a highly diversified loan portfolio in terms of product and geography. Given the decline in the Fed rate cut, the company’s NII is likely to witness an increase in the upcoming period.
As of Sept. 30, 2024, HomeStreet’s non-performing assets were $43.3 million, or 0.47% of total assets, compared with $39.7 million, or 0.42% of total assets, as of Sept. 30, 2023.
The Zacks Consensus Estimate for HMST’s 2024 earnings indicates a 347.7% year-over-year decline, while that for 2025 earnings suggests a 132.7% year-over-year surge. HomeStreet has a market capitalization of $215.4 million. This Zacks Rank #2 company's shares have climbed 19.5% over the past year.
Price and Consensus: HMST
Zacks Investment Research
Citizens Community: This is the holding company of Citizens Community Federal N.A, a national bank based in Altoona, WI, with 22 branch locations. It offers traditional community banking services to businesses, agriculture operators and consumers, including residential mortgage loans. Its strategy is to focus on organic growth and the buyout of smaller community banks in its markets.
The company’s revenues decreased in the first nine months of 2024. This was due to lower NII and fee income.
Though total loans and leases declined in the first nine months of 2024, CZWI’s efforts to transform its loan portfolio, and a favorable deposit mix will likely strengthen its balance sheet in the upcoming period.
As of Sept. 30, 2024, non-performing assets were $17.1 million, or 0.95% of total assets, compared with $15.4 million, or 0.85% of total assets, as of Sept. 30, 2023.
CZWI presently carries a Zacks Rank #2. The Zacks Consensus Estimate for CZWI’s 2024 earnings indicates a 4.7% year-over-year increase, while that for 2025 earnings implies a 2.2% year-over-year decline.
The company has a market capitalization of $163.5 million. Its shares have climbed 45.1% over the past year.
Price and Consensus: CZWI
Zacks Investment Research
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