Bank stocks underperformed the broader market in 2019. A changing landscape with increasing competition from fintech disruptors, low interest rates, and one-off credit events all played their part in stifling the industry’s growth. While the BANK index generated returns of more than 20%, the number still fell short of the S&P 500’s 29% increase.
2020 brings with it new uncertainties, too; A U.S. presidential election, EPS volatility expected from CECL (current expected credit loss), the unavoidable change in the credit cycle, all attaching risk to financial stocks.
While the sector is trading at one of the lowest multiples over the last two decades compared to the S&P 500, there are particular banking stocks that present a compelling opportunity.
Investment firm Stephen sees several important stock plays in the banking industry for investors to consider in coming months. Using TipRanks’ Stock Comparison, we were able to read the fine print on 3 top picks the firm thinks investors should take note of in 2020. Additionally, we’ve confirmed that Stephen is in the majority on Wall Street in recommending these equities.
Sterling Bancorp (STL)
We’ll start off with a trip down to Montebello, New York, the home of regional bank holding company, Sterling Bancorp. STL focuses on providing financial services to small and midsize business owners, families, and consumers, primarily in the greater New York metropolitan area. Sterling stock beat the financial sector’s returns in 2019 and matched the S&P 500’s yearly 29% gain.
Stephen’s Matthew Breese believes Sterling’s “profitability metrics as measured by ROA and ROTCE remain in the top quartile of peers.” The 4-star analyst argued these have helped drive “first/second quartile EPS and TBV growth over the last year and five years, respectively.”
Furthermore, the analyst points out that Sterling’s balance sheet and EPS growth could be bolstered by portfolio purchases as well as further M&A activity. Historically, STL has been opportunistic in this regard and could pursue a similar strategy through 2021.
Breese added “With accretable yield expected to fall to ~15bp of the NIM by early 2020, we anticipate net interest income will fall by ~2% in 2020 before inflecting and growing in 2021 by ~2%. Helping drive the inflection point is organic loan growth, anticipated at ~6%-8% through 2021… We think shares of STL are undervalued trading at~9x 2021 EPS vs. its historical 10-year P/E of 13.7x. In addition, when we compare STL to less profitable peers, the stock looks attractive, trading at a 3x-4x discount to peers on a P/E basis despite a ROA that’s superior by ~30bp.”
Accordingly, the 4-star analyst reiterated an Overweight rating on STL. The accompanying price target of $25 suggests upside potential of 23%. (To watch Breese’s track record, click here)
In general, the rest of the Street is on the same page. 5 "buy" ratings compared to 1 "hold" assigned in the last three months give it a Strong Buy analyst consensus. At the $25.75 average price target, shares could surge 24% over the next twelve months. (See Sterling Bancorp stock analysis on TipRanks)
Spirit Of Texas Bancshares (STXB)
Moving to the south, we head over to the Lone Star State, the home of Spirit Of Texas Bancshares. STXB is a fellow holding company with 36 locations across the state.
The bank has been busy on the shopping front and in November, completed the acquisition of Chandler Bancorp, a deal which cost Spirit $17,900,000 million. The purchase marks Spirit’s tenth acquisition in Texas and third since going public in 2018. Full integration is expected by mid-2020, and Stephens’ Matt Olney believes that following the merger STXB “can improve its efficiency ratio to below 60% (currently at 62%).”
An additional positive indicator for Olney is STXB’s loan portfolio, the majority of which is a combination of fixed rate or variable rate currently at a floor rate. Olney expects “earning asset yields to remain relatively stable which should help protect the Bank's strong NIM (net interest margin) of 4.63%.”
Following a 3Q19 secondary equity capital raise, STXB’s “capital position remains strong.” Olney further added, “We believe STXB remains well capitalized for M&A opportunities and we expect the company to remain acquisitive and is targeting banks in the $300 million-$1billion in asset range. We estimate there are 100+ banks in their footprint within this specific range. Assuming the next deal is well structured, we anticipate the EPS accretion could be between mid to high-single-upper digits to low double digits.”
As a result, the analyst left his Overweight rating and $28 price target as is. Should the target be met, investors’ boots will be stuffed with a 22% gain over the next 12 months. (To watch Olney’s track record, click here)
Where do other analysts stand on the Spirit of Texas’ prospects for 2020? While the rest of the Street remains fairly quiet, the two fellow analysts chiming in with a view both put Spirit in the Buy category. The bank’s Strong Buy consensus rating comes with an average price target of $26.17 and indicates upside potential of 14%. (See STXB stock analysis on TipRanks)
Ameris Bancorp (ABCB)
For our final stock, we head up to Georgia, the base of regional bank, Ameris Bancorp. With $17.8 billion in total assets, the financial holding company has a foothold in the Southeastern states, with retail and commercial customers in Georgia, Alabama, Florida, South Carolina, and Tennessee.
In July ’19, Ameris completed the acquisition of Fidelity Southern Corporation in a deal valued at $750.7 million. The deal adds Fidelity’s 62 bank branches to Ameris’ roster, 46 of which are located in Georgia and 16 in Florida. Stephen analyst Tyler Stafford believes the merger “added a high-quality deposit base (0.65% cost) and provides substantial liquidity.”
Ameris had a highly profitable ROA (return on assets) of 1.54% in 2019. Stafford thinks this will “accelerate to 1.58% in 2021 given the added benefits of the LION acquisition.” The 4-star analyst also notes that “ABCB should see tailwinds in its mortgage division in the current interest rate environment.” Stafford models for mortgage fees/total revenue of 18%/16% in 2020 and 2021.
“While ABCB has grown from about $5 billion to $17 billion in assets over the past 4 years (organically and through M&A), we believe the company is on the M&A sidelines over the next ~4-6 quarters as it focuses on capitalizing on the LION acquisition/Atlanta market disruption,” Stafford added.
Based on the above, Stafford reiterated an Overweight rating on Ameris alongside a price target of $51, which implies potential upside of 19% from current levels. (To watch Stafford’s track record, click here)
Overall, the Georgia bank has three other analysts currently following its progress, and all rate ABCB a Buy. Thus, Ameris qualifies as a Strong Buy. The average price target comes in at $50 and indicates upside potential of 17%. (See Ameris price targets and analyst ratings on TipRanks)