Finding the Smaller Bank Stocks With Growth
As Wall Street debates the prospects for big, drama-prone financial institutions, and industry analysts continue to pan the growth potential of regional banks, several small institutions have quietly gained favor with investors.
East West Bancorp (EWBC), First Republic Bank (FRC) and Susquehanna Bancshares (SUSQ) have attracted buy recommendations from the vast majority of analysts that follow them, which is quite an accomplishment in this sector now. Most of the biggest and best-known regional banks, including Huntington Bancshares (HBAN), BB&T Corp (BBT) and M&T Bancorp (MTB) are awash in hold recommendations for PE ratio, low growth possibilities or other problems.
These three little ones – they each have assets under about $33 billion – saw their share prices flounder last year with the rest of the banking sector. New regulations limiting certain bank fees, and the thin line between the interest banks pay and what they collect, continue to make significant underlying revenue growth difficult for most regional banks. But interest picked up in each of the shares at the end of the year, for different reasons.
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In the past two months, several analysts upgraded their ratings on East West to outperform. East West specializes in financing international trade, particularly between the U.S. and China, as well as commercial construction, and an improved outlook on that overseas economy inspired more optimism about the company. Its revenues and its share price declined last year when China’s growth slowed, as seen in a stock chart. The bank announces earnings Jan. 24 and perhaps will offer more insight into the year ahead.
First Republic and Susquehanna each have growing asset management and mortgage divisions, and acquisitions have helped boost revenues too. First Republic, a spin-off from Merrill Lynch back when that group went to Bank of America (BAC) in 2009, agreed to buy Luminous Capital Holdings and its $5.9 billion in assets under management late last year.
Susquehanna last year made two major acquisitions, Abington Bancorp and Tower Bancorp, and is expected to find more this year. Susquehanna’s business generally is helped by a concentration in Pennsylvania, where natural gas production has made the economy stronger than much of the rest of the nation. It too announces earnings Jan. 24.
Last year, Texas Capital Bancshares (TCBI) and Arkansas’ Home BancShares (HOMB) proved that investors could make substantial money in tiny banks. Texas Capital, which has fed off growing demand for oil company loans in the recent drilling boom, ended the year up 42% and with a market cap of $1.87 billion; Home BancShares, which has bought competitors in other states, offered a 26% gain and a market share still under $1 billion. But East West, First Republic and Susquehanna are now touted as better value.
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Unlike last year’s big gainers, each of these three pays a dividend. Dividend yields now are: East West, 1.7%; First Republic, 1.1%; and Susquehanna, 2.5%.
The underlying problems in banking these days – low margins and low loan demand, for example – are expected to suppress bank growth generally for some time ahead. The ongoing debate about bank regulations, particularly for investment banking operations, also makes it difficult for investors to predict bank earnings power. Looking at small banks doing well in niches may be the quickest way to find potential investments in the sector.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.