At a time when the Fed is considering freezing rate hikes for the year, market watchers and fund managers think banks could be a great investment option. Smaller ones in particular stand to reap the benefits of a host of favorable factors. These include a strong economy and the prospect of higher inflation and a wider rate spread.
Further, banking had a banner year in 2018, with not a single bank failure reported during this period. Additionally, small banks, in particular, have benefited from the Trump administration’s deregulatory measures. With several factors working in their favor, investing in smaller bank stocks could be an extremely profitable option at this point.
Multiple Factors Boosting Smaller Banks
The first factor to consider when investing in small caps is the risk appetite of the investor. However, with the economy remaining strong, the prospect of bank failures reduces considerably.
The recent better-than-expected reading for fourth-quarter GDP is testament to this fact. Additionally, economists largely believe that inflation will soon make a comeback.
A higher level of inflation usually translates into higher interest rates. This would go a long way toward correcting the yield-curve problem. More significantly, there is currently a real opportunity for net interest margins to expand.
With the Fed unlikely to raise rates in the short term, the rise in deposit gathering costs is likely to cease altogether. And if the economy continues to do well, such a scenario may see long-term rates moving upward.
2018 Sees No Bank Failure, Deregulation Benefits Small Banks
Not a single bank failure occurred in 2018, which demonstrates the robust health of the U.S. banking industry. This was the first such year since 2006 and only the third since 1933 that a year elapsed without a bank failure. This was largely attributable to strong economic growth, tax cuts and post-2008 financial rules, which boosted bank safety.
And yet small banks have benefited the most from the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act last May. Provisions related to mortgage lending, capital and data collection have been relaxed considerably.
This has improved both profitability and efficiency of smaller banking operations. Further deregulation is unlikely since the House of Representatives is now dominated by Democrats.
But regulators retain the power to ease business conditions for banks with smaller operations. On their part, bankers are going easy with daily supervision. (Read: Buy These 5 Top Small Banks to Boost Portfolio Gains)
A strong economy and the prospect of higher inflation imply that smaller banks may not be as risky as investments as they appear at first glance. Further, a spike in prices and a freeze on short-term rate hikes could boost their net interest margins.
Additionally, banks have gained significantly from the Trump administration’s deregulation measures. With the sector on a firmer footing, not a single bank failure occurred in 2018.
This is why it makes sense to pick up select small bank stocks. We have narrowed down our search based on a Zacks Rank #1 (Strong Buy) and other relevant metrics. You can see the complete list of today’s Zacks #1 Rank stocks here.
Atlantic Capital Bancshares, Inc. ACBI is the bank holding company for Atlantic Capital Bank, which offers a range of banking products and services.
Atlantic Capital Bancshares’ projected growth for the current year is 27.2%. Its earnings estimate for the current year has improved by 5.1% over the last 30 days.
The Bank of Princeton BPRN provides a variety of banking products and services.
Bank of Princeton’s projected growth for the current year is 15.7%. Its earnings estimate for the current year has improved by 2.1% over the last 30 days.
Byline Bancorp, Inc. BY is the bank holding company for Byline Bank, which offers a range of banking products and services.
Byline Bancorp’s projected growth for the current year is 37.3%. Its earnings estimate for the current year has improved by 4.7% over the last 30 days.
Civista Bancshares, Inc. CIVB is the bank holding company for Civista Bank, which provides a variety of banking products and services.
Civista Bancshares’ projected growth for the current year is 9.5%. Its earnings estimate for the current year has improved by 4.4% over the last 30 days.
Middlefield Banc Corp. MBCN is the bank holding company for The Middlefield Banking Company, which offers a range of banking products and services.
Middlefield Banc Corp’s projected growth for the current year is 10.7%. Its earnings estimate for the current year has improved by 6% over the last 60 days.
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