For Immediate Release
Chicago, IL – April 01, 2015 – Today, Zacks Equity Research discusses the U.S. Banks (Part 2), including Bank of the Ozarks, Inc. (OZRK-Free Report), Southern First Bancshares, Inc. (SFST-Free Report), Chemical Financial Corp. (CHFC-Free Report) and Customers Bancorp, Inc. (CUBI-Free Report).
Industry: U.S. Banks (Part 2)
Link: https://www.zacks.com/commentary/40951/us-banks-offer-profits-industry-gaining-ground
The overall progress of the U.S. banks since the last recession is pretty impressive. Most importantly, banks have earned the ability to deal with crises. They can now dodge pressure from the operating environment more easily. Added to these is the likely change in the interest rate scenario in their favor, with sustained GDP growth and reduction in unemployment.
The likely interest rates hike, though at a slower pace, will ease some pressure on net interest margin (NIM) –- banks’ key source of earnings. Small community banks, in particular, will be the beneficiaries of the expected rate hike later this year, as the majority of their profit is dependent on lending.
Looking at fundamentals, cost containment and balance sheet recovery hold the key to the banks’ success. While cost containment can be perceived as a defensive measure, balance sheet recovery should help banks prosper.
Balance Sheet Recovery on Track
Lack of low-risk investment opportunities for Americans has been continuing to aid banks’ deposit growth. Also, demand for loans from consumers and commercial borrowers has been growing with recovering economic conditions and easier lending standards.
Moreover, improvements in GDP, employment and other economic indicators have been boosting the balance sheets of banks. But the likely change in interest rate environment later this year will result in unrealized losses on underlying securities.
However, 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. Yet we don't expect balance-sheet strength to return to the pre-recession peak anytime soon.
"Problem Banks List" Shortens Further
Fourth quarter of 2014 marked the 15th straight quarter of decline in the FDIC's "Problem List." The list contained 291 names as of Dec 31, 2014, down from 329 as of Sep 30, 2014. In fact, this is the lowest level since the end of 2008 and represents a 67% decline from the post-crisis high of 888 as of Mar 31, 2011.
This reflects improvement, no doubt, but the number looks extremely high considering the occurrences of the financial crises six 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 have been much less. This indicates that the industry is still fraught with trouble.
However, the number of bank failures has declined every year since 2010. In 2014, total 18 banks failed compared with 24 failures in 2013 (versus 51 in 2012, 92 in 2011 and 157 in 2010). Though the pace of bank failures has been decelerating, the industry is still to see an average failure of just four or five banks annually, which would indicate its maximum strength.
"Too-Big-To-Fail" Notion to be a Thing of the Past
Mega-banks have been benefiting from lower funding and operating costs since the financial crisis six years ago. This is because of the impression that the Federal Reserve will always protect these banks from failing in case of any major financial trouble.
However, the advantages have been waning in recent years. Regulatory changes, in particular the 2010 Dodd-Frank law, made these systematically important banks self-sufficient (in terms of capital reserves) to some extent, to endure any further crisis. So the likelihood of a bailout is less now.
Further, a new set of rules put forth by the Financial Stability Board (FSB), expected to take effect in 2019 following the G2O leaders’ endorsement, would make the "too big to fail" notion a thing of the past. The rules would require the world’s 30 so-called "systemically important" banks to hold up to one fifth of their risk-weighted assets in the form of debt or equity. This buffer would bolster these banks in case of any risk of failure.
Though the biggest banks will continue to enjoy low borrowing costs and take bigger risks until these rules are implemented, the advantages should wane with time. This will actually make the competitive landscape better for small and mid-cap banks.
Stocks Worth Betting On Now
As you can see, there are plenty of reasons to be optimistic about the U.S. banking industry now. So one can consider buying some bank stocks that promise better performance based on their strong fundamentals and a favorable Zacks Rank.
Specific banks that we like with a Zacks Rank #1 (Strong Buy) include Bank of the Ozarks, Inc. (OZRK-Free Report), Southern First Bancshares, Inc. (SFST-Free Report), Chemical Financial Corp. (CHFC-Free Report) and Customers Bancorp, Inc. (CUBI-Free Report).
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BANK OZARKS (OZRK): Free Stock Analysis Report
SOUTHN FIRST BC (SFST): Free Stock Analysis Report
CHEMICAL FINL (CHFC): Free Stock Analysis Report
CUSTOMERS BANCP (CUBI): Free Stock Analysis Report
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