Zacks Industry Outlook Highlights: 1st Constitution Bancorp, Oritani Financial, CenterState Banks, Bancsystem and American River Bankshares
Zacks Equity Research
Updated
For Immediate Release
Chicago, IL – April 07, 2016 – Today, Zacks Equity Research discusses the U.S. Banks, (Part 2), including 1st Constitution Bancorp (FCCY), Oritani Financial Corp. (ORIT), CenterState Banks, Inc. (CSFL), Bancsystem Inc. (FIBK) and American River Bankshares (AMRB).
The underperformance of bank stocks over the last few months reflects investors’ concerns over the industry’s vulnerability to a flattening yield curve. And the trend might not reverse until there is some sort of certainty on the rate hike front. However, the concern seems overblown now and affected bank stocks more than what was warranted by their fundamentals.
Looking beyond the uncertainty over the Fed’s rate hike schedule, banks have earned significant fundamental strength by reorganizing their business models. Also, while global economic uncertainty has weighed on the prospects of a steady rate hike, it might not stop the Fed for long given the improvement witnessed so far in the domestic economy. At least, the backdrop is not as bad as is needed to keep the rates low for long.
Therefore, U.S. banks will undoubtedly get a boost from a rising rate cycle sooner or later. This, along with the strength in core business earned by passing through dragged out regulatory scanners, should help them reach the turning point of consistent growth before long.
While banks’ earnings performance has not been very impressive over the last few years, it is evident from the results that aggressive actions have paired up with defensive measures like expense control to make them tide over persistent challenges. Moreover, banks have earned the ability to deal with crises. They can now dodge pressures from the operating environment more easily.
In terms of fundamentals, along with strategic changes in the business model and a deeper focus on boosting profitability, balance sheet recovery and expense management should keep banks moving toward a sustainable future.
(Check out our latest U.S. Banks Stock Outlook for a more detailed discussion on the fundamental trends.)
Key Fundamentals Look Impressive
A rising rate environment would have different implications for different banks depending on the interest rate sensitivity of their balance sheets. Banks generally tend to keep deposit rates low and lending rates higher when rates rise. While banks having more deposits in low-rate accounts will benefit the most from rising rates, others will also benefit from reduced margin pressure.
Further, demand for loans from consumers and commercial borrowers is on the rise with recovering economic conditions and easier lending standards.
Moreover, banks are trying to reorganize risk management practices to address potential solvency issues from rising interest rates. Asset-quality troubles are also being addressed by divesting segments containing nonperforming assets.
FDIC’s "Problem List" Continues to Shrink
The final quarter of 2015 marked the 19th straight quarter of decline in the FDIC's "Problem List." The list contained 183 names as of Dec 31, 2015, down from 203 as of Sep 30, 2015. In fact, this is the lowest level since the end of 2008 and represents about 80% decline from the post-crisis high of 888 as of Mar 31, 2011.
This undoubtedly reflects improvement, but the number is still high considering the occurrence of the financial crisis nearly eight years back. There were only 76 banks on the Problem List at the end of 2007, just before the crisis.
Considering the recovery witnessed by the economy and stock markets so far, the number of problem banks ought to currently be much lower. This indicates that the industry is still experiencing trouble.
The number of bank failures has nonetheless declined every year since 2010. With the fourth quarter witnessing just two failures, a total of 8 banks failed in 2015 compared with 18 failures in 2014 (versus 24 in 2013, 51 in 2012, 92 in 2011 and 157 in 2010). Though the pace of bank failures has been decelerating, the industry has yet to see an average failure of just four or five banks annually, which would indicate maximum strength.
Major Banks Bound to Fortify Liquidity Standards
Regulatory changes, in particular the 2010 Dodd-Frank law, made systematically important banks self-sufficient (in terms of capital reserves) to some extent, to endure any further crises. So the likelihood of a bailout is now reduced.
Last year, a proposal by the Fed required the large banks to add another buffer to make them more capable of dealing with future crises and correct their "too big to fail" perception. In order to meet the requirements, six of the eight key U.S. banks would need to raise $120 billion, per Fed officials.
Further, a new set of rules put forth by the Financial Stability Board (“FSB”) would make the "too big to fail" notion a thing of the past. The rules would require each of the world’s 30 so-called "systemically important" banks to have total loss absorbing capacity of 16% of total assets by 2019 and 18% by 2022. This would act as a buffer should any of these banks run the risk of failure.
Though the biggest banks will continue to enjoy low borrowing costs and take bigger risks until these rules are effective, the advantages should wane with time. This will actually make the competitive landscape better for small and mid-cap banks.
Enhanced Focus on Competitive Advantage
Along with the adoption of advanced technologies to enhance cyber security, banks are resorting to increased use of analytics to drive efficiency. This could help them to better formulate strategies and enhance the performance of different business segments.
While analytics can impact their expense line in the quarters ahead, concerted efforts to cut needless expenses should more than offset it.
Stocks to Bet on Now
Since there are plenty of positive drivers amid broader concerns, one can consider buying some beaten down bank stocks that promise better performance. Picking those with a favorable Zacks Rank is an easy and effective way.
Specific banks that we like with a Zacks Rank #1 (Strong Buy) include 1st Constitution Bancorp (FCCY), Oritani Financial Corp. (ORIT) and CenterState Banks, Inc. ( CSFL).
Stocks in our U.S. banking universe with a Zacks Rank #2 (Buy) currently include First Interstate Bancsystem Inc. (FIBK) and American River Bankshares ( AMRB).
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