While large financial institutions like JP Morgan (JPM) or Citigroup (C) are in the headlines every day, those stocks are probably going to underperform their smaller counterparts during the current cycle. Smaller, lesser-known bank stocks are in a better position to benefit from the improving economic backdrop for the banking business than larger banks. That’s because the smaller banks are able to focus on conservative banking practices without being distracted by trading operations, exotic financial products or international capital flows.
The banking industry has been experiencing strong growth over the last year or so. This growth has come from improving credit conditions, a low interest rate environment and weaker banks exiting the business.
Improving credit conditions have resulted in a reduction of non-performing loans and fewer charge-offs. Low interest rates have allowed banks to increase their net interest margins. Banks that survive this difficult period are experiencing solid growth in core deposits. These factors all contribute to banks generating a higher level of earnings that are more stable than in the previous cycle.
According to the FDIC’s Quarterly Banking Profile, the banking industry had earnings of $18 billion in the first quarter of 2010. That was the industry’s best quarter in two years. Also, over half of the banks reported year-over-year net income growth. That’s the highest percentage since the third quarter of 2006.
To be sure, there are several risks that are negatively-affecting bank stock prices. These include macro issues such as the sovereign debt issues, high unemployment, a double dip in housing and the sustainability of an economic recovery. Those risks, for the most part, are already reflected in bank stocks.
That said, the biggest risk banks are facing comes from regulatory reform, which is currently being debated in Congress. Specifically, the Collins Amendment, which was part of the Senate’s bill, could result in significant dilution for those banks that haven’t repaid TARP or have a large part of their Tier 1 capital in the form of trust preferreds.
While the risks facing banks are not overblown, it appears those risks are also baked into current bank stock prices. That means if those risks don’t pan out as expected, there is substantial upside potential in smaller bank shares.
Below are five bank stocks that should continue to benefit from improving credit quality and generate strong earnings growth, while managing to side-step the biggest risks facing the financial sector.
Beneficial Mutual Bancorp (BNCL)
Beneficial is the fourth-largest mutual holding company in the U.S. with 68 branch offices and total assets of $4.7 billion. As of February 3, 2010, it operated 68 banking offices in greater Philadelphia and New Jersey.
BNCL earned $0.10 per share in the first quarter, easily beating the Zacks Consensus Estimate by 4 cents, or 66.7%. In the last three quarters, Beneficial has beaten expectations by an average of 83.9%.
In the last two months, the 2010 Zacks Consensus Estimate is up 6 cents, or 23.1%, to $0.32 per share, while the Zacks Consensus for 2011 is higher by 3 cents, or 8.1%, to $0.40.
Beneficial Mutual is a Zacks #2 Rank (‘buy’) stock that is trading at 33x 2010 consensus EPS estimates and 26x 2011 consensus estimates.
Dime Community Bancshares (DCOM)
Dime Community Bancshares operates as the holding company for The Dime Savings Bank of Williamsburgh, which provides financial services and loans primarily for rent-stabilized apartment buildings. Dime has $4.1 billion in assets. As of January 26, the company operated 23 branches located in Brooklyn, Queens and the Bronx, New York.
DCOM reported first-quarter EPS of $0.28, topping the Zacks Consensus Estimate by a penny. In the last two months, the Zacks Consensus Estimate for 2010 is higher by 8 cents, or 7.1%, to $1.20 per share. The outlook for 2011 is up 6 cents, or 4.8%, to $1.30.
Dime is a Zacks #2 Rank (‘buy’) stock that trades at 11x 2010 consensus EPS estimates and 10x 2011 consensus estimates.
First Niagara Financial Group (FNFG)
First Niagara Financial Group operates as the holding company for First Niagara Bank, which provides banking and financial services to individuals, families and businesses. First Niagara has about $20 billion in assets. As of December 31, 2009, FNFG operated 171 bank branches, including 114 branches in Upstate New York and 57 branches in western Pennsylvania.
FNFG has matched the Zacks Consensus Estimate in the last two quarters. In the last 60 days, the 2010 Zacks Consensus Estimate is up 3 cents to $0.87, and the guidance for 2011 is up a penny to $1.12.
First Niagara is a Zacks #2 Rank (‘buy’) stock that trades at 15x 2010 consensus EPS estimates and 12x 2011 consensus estimates.
Old National Bank (ONB)
Old National Bancorp operates as the holding company for Old National Bank, which provides financial services primarily in Indiana, Illinois, and Kentucky. ONB has $7.9 billion in assets. As of December 31, 2009, it operated a total of 172 banking centers, loan production or other financial services offices.
Old National earned $0.12 per share in the first quarter, beating the Zacks Consensus Estimate by 7 cents, or 140%. This prompted analysts to boost their EPS estimates for 2010 and 2011. The consensus for 2010 increased 17 cents, or 60.7%, and the consensus for 2011 climbed 10 cents, or 18.2%.
Old National Bank is a Zacks #1 Rank (‘strong buy’) stock that trades at 25x 2010 consensus EPS estimates and 18x 2011 consensus estimates.
S&T Bancorp (STBA)
S&T Bancorp operates as the holding company for the S&T Bank, which has about $4 billion in assets. It provides community banking services to individual and corporate customers in 53 offices located throughout the suburbs of Pittsburgh.
In the last two months, the 2010 Zacks Consensus Estimate is up 11 cents, or 8.9%, to $1.35 per share, while the Zacks Consensus Estimate for 2011 is up 3 cents, or 1.9%, to $1.65.
S&T Bancorp is a Zacks #2 Rank (‘buy’) stock that trades at 16x 2010 consensus EPS estimates and 13x 2011 consensus estimates.
