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Bright Near-Term Outlook for Savings and Loan Industry

Zacks Equity Research

The Zacks Savings and Loan industry consists of specialized U.S. banks that provide residential mortgages, commercial and industrial mortgages, home equity loans, vehicle loans and other business loans.

These institutions fund mortgages insured by the Federal Deposit Insurance Corporation.

Though these firms operate similarly to commercial banks by providing various banking services such as checking and savings accounts, they are are bound to invest 65% of their asset holdings in residential mortgages. Moreover, these firms are locally owned and provide the best rates on mortgages.

Here are the three major themes in the industry:

  • Over the last few years, an improving domestic economy and rising demand for residential mortgages have favored the U.S. savings and loan industry. Rising income of Americans, along with a not-so-unfavorable interest rate environment, has supported the housing market by enhancing demand for residential mortgages. Lesser regulatory supervision and an improving housing market, though at a slow pace, are anticipated to keep driving the industry’s growth in the upcoming quarters too.
     
  • Meanwhile, a rising rate environment will likely somewhat dampen loan demand, as consumers will try to avoid taking loans at higher rates. Particularly, weakness in revolving home equity loans may offset growth in the commercial and industrial (C&I), consumer and overall real estate loans to some extent. Moreover, the industry is exposed to extreme competition with commercial banks, credit unions and other non-bank organizations that offer similar financial services.
     
  • For 2019 and beyond, multiple challenges will crop up for the savings and loan companies, including legacy technologies and an unbalanced customer base, in the course of undertaking better initiatives for significant growth. Thus, to remain competitive and reap profits in the rapidly-evolving market, these companies will need to ramp-up transition into diligently-focused, technology-driven and flexibly-operating institutions.


Zacks Industry Rank Indicates Solid Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects.

The Zacks Savings and Loan industry currently carries a Zacks Industry Rank #86, which places it at the top 34% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Our proprietary Heat Map shows that the industry’s rank has remained volatile over the past six weeks.
 


 

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Notably, the industry’s earnings estimates for the current year have been revised slightly upward over the past year.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags on Shareholder Returns

The Zacks Savings and Loan Industry, a 34-stock group within the broader Zacks Finance Sector, has underperformed the S&P 500 and its own sector over the past two years.

While the stocks in this industry have collectively declined 8.5%, the Zacks S&P 500 Composite and Zacks Finance Sector have rallied 19.3% and 5.7%, respectively.

Two-Year Price Performance




Industry’s 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 results from one quarter to the next. 
  
The industry currently has a trailing 12-month P/TBV of 1.51X, above the median level of 1.50X, over the past five years. This compares with the highest level of 2.14X and lowest level of 1.13X over this period.

However, the industry is trading at a discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 10.28X and the median level is 7.84X.
 

Price-to-Tangible Book Ratio (TTM)


 

The Zacks Finance sector’s trailing 12-month P/TBV ratio of 2.97X and the median level of 3.08X for the same period are above the Zacks Savings and Loan industry’s respective ratios.

Price-to-Tangible Book Ratio (TTM)


Bottom Line

Though rising rates may impact savings and loan stocks, continued benefits from a favorable operating environment, stabilizing housing market and increasing consumer income will keep the momentum alive.

One should particularly consider betting on savings and loan stocks that depict an upbeat earnings outlook. We are presenting two stocks with a Zacks Rank #1 (Strong Buy) and one with a Zacks Rank #2 (Buy) that investors may consider betting on.

3 Savings and Loan Stocks to Bet on

Great Southern Bancorp, Inc. (GSBC): The stock of this Springfield, MO-based bank has gained 8.7% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised 5.6% upward over the last 30 days. The stock currently sports Zacks Rank #1. (You can see the complete list of today’s Zacks #1 Rank stocks here)

Price and Consensus: GSBC



 

Dime Community Bancshares, Inc. (DCOM): The consensus EPS estimate for this Brooklyn, NY-based bank has moved 4.8% north for the current year, over the last 30 days. This Zacks Rank #1 stock has rallied 7.2% over the past year.

Price and Consensus: DCOM



 

First Defiance Financial Corp. (FDEF): The stock of this Defiance, OH-based bank has risen 7.8% over the past year. The consensus EPS estimate for the current year has been revised 0.4% upward over the last 30 days. The stock currently carries a Zacks Rank #2.

Price and Consensus: FDEF


 

Zacks' Top 10 Stocks for 2019

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