Banking on the Community - Zacks Industry Rank Analysis

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Industry Rank Analysis 12-07-11

The last few years have sure been rough for the banking industry, and the big banks still face a host of problems, ranging from downright criminal incompetence in handling foreclosures (the "robo-signing" scandal) to exposure to the mess in Europe. On the other hand, the government has bent over backwards to be nice to the industry. Bailout funds were provided on extremely favorable terms.

The Fed has kept short-term rates pegged at near zero for almost three years now, and has promised to keep them there until at least the middle of 2013. Short-term funds are the raw material of the banking system.

The Justice Department has also been nice, at most imposing slap-on-the-wrist-type fines (not to mention the lack of indictments of high-level bankers stemming from the near collapse of the entire banking system, and the widespread fraud that caused it). The events of the last few years have proved that the best way to rob a bank it to own one, or at least be a high ranking executive of one.

Community Banks Are Different

On the other hand, your local bank with four or five branches is a very different animal than a Citigroup ( C ) or a Bank of America ( BAC ). For starters, if they screw up, they go out of business. So far this year 90 of them have, (down from 157 in 2010 and 140 in 2009, and there will probably be fewer in 2012) and I would expect to see at least one or two fail each week between now and the end of the year.

The folks running these banks do not have the perverse incentive to take as much risk as possible the way the big banks do. Unlike the big guys, if they screw up, they -- or at least their shareholders -- pay, not the taxpayers.  

As the economy has gradually improved, and the bad loans made during the worst of the bubble roll off, the condition of the banks balance sheets has improved. Consumer delinquencies -- while still high -- have been falling, and time has been working its magic in healing the wounds. Some of the reserves that banks had set aside for bad loans now seem excessive, and those reserves are being released, and less new money has been put aside.  

Free raw materials (deposit rates near zero) have made the loans that the banks have been making recently very profitable. As a result, many small banks, which don't face many of the problems of the big guys, have been showing surprisingly positive earnings. As a result they are performing very positively on the Zacks Rank.

Zacks Industry Classifications

The Zacks industry classifications are very fine, with 258 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well; a single firm with good news can propel a one- or two-firm industry to the top (or bottom) of the charts.

It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list. The definition of size that matters here is not the total sales or market capitalization, but the number of companies in the "industry."  

Breaking Down the Groups

We break up the overall bank sector into five regional groupings, plus a "multi-regional" group that is mostly the "too big to fail" (TBTF) firms. We also have a separate "industry" for the foreign banks.

Four of the five regional groupings are all showing up as attractive on the Zacks Industry Rank (the remaining one, Southeast Banks, is close to neutral). The domestic TBTF group is decidedly in the middle of the pack, and the foreign "industry" looks downright awful on the Zacks Rank.

There are also two "industries" that are very closely related to banks that show up as attractive: Consumer Loans and Financial Transaction Services. The two heavyweights in transaction services, Visa ( V ) and MasterCard ( MA ), simply dwarf the size of most of the community banks that make up the rest of the lists below. All of the regional groupings are bigger than average by number of firms, and most are among the very biggest industries (by number of firms).

Given the law of large numbers, it is very hard for a huge industry to find itself at the very top, or the very bottom of the industry list. If a big industry gets close to either end, it is worth paying attention to.

The Southwest region "industry" is the strongest of the true bank groups, coming in 12th place with an average Zacks rank of 2.33, down from 2.67 last week and a 35-spot improvement. The Southwest group has 12 firms in it, the smallest of the regional groups and probably the reason it is the best regional grouping. Normally industries in the top 15 have fewer than ten firms in them, and often much lower than that.

The Midwest Banking "industry" was the next best, in 18th place, a seven-spot deterioration as its average rank rose to 2.37 from 2.33. The Midwest "industry" has 35 stocks in it. The West is in 35th place with an average rank of 2.53, a nine-slot improvement as the average rank fell from 2.58 last week.

The final true bank group to show up as attractive is the Northeast, with 59 firms. Their rank is not that impressive in absolute terms, coming in at 46, but it is an 8-spot improvement.

The Consumer Loans industry is actually the strongest of them all in 4th place, a 14-spot improvement as its average rank fell to 2.00 from 2.38.  It is, however, only an average-sized group with seven members. Transaction Services is in 24th place with an average rank of 2.47.

If the Zacks Ranks were distributed randomly, one would expect that only 5% of the members of these "industries" would earn the coveted Zacks #1 Rank (Strong Buy).  Instead, 25 of the total of 168 (14.9%) have earned that distinction. If it were random, only 15% would hold Zacks #2 Ranks (Buy) but actually 47, or 28.0%, hold it. In other words, there are attractively ranked small banks in every area of the country.

Lesser Known, but Not Lesser Investments

You have probably never heard of most of these banks. Some of them you might recognize if they happen to operate in your town, but it is a fair bet that the names of most of them have never, or at least very rarely, been uttered on CNBC. That, however, does not mean that they cannot be good investments.

This is a group that cries out for a "package approach." None of the banks on either of the lists are large caps, and even the mid-caps are on the small side of the mid cap range. In fact, taking the two lists together, sub-$100 million micro-caps outnumber firms with market caps over $1 billion by 30 to 9. You can create a "synthetic" national bank - one that avoids the regional risk that these banks pose -- by having a portfolio made up of small positions in many of these names, rather than just taking one normal-sized position. Given the thin trading volumes in these names, even an individual investor could impact the price if they tried to take a big portion in just one of these names.

The valuations are for the most part reasonable, and while I don't show the FY2 over FY1 growth on the tables, you can get a good idea of it by looking at how much lower the P/E for next year is relative to the P/E for this year. Most are expecting solid, but not spectacular growth, and you are paying a reasonable price for those earnings. Not rock bottom for the most part, but very reasonable.

Unlike the big guys, most of these firms are free to pay whatever dividends their boards deem appropriate (the TBTF ones need to ask permission from the Fed, and the Fed has not been inclined to say yes for most of them, and should not for quite some time to come). Many of these small-fry banks provide very attractive dividend yields. Most are seeing big increases in their estimates for both this year and next.

However, just as a word of warning, they tend to be thinly covered, so an individual analyst raising his or her numbers for the firm has a much bigger impact on the mean estimate than is the case with the big, well-covered banks. Still, higher earnings will allow these banks to pay higher dividends in the future, so if you do buy them and tuck them away, there is a very good chance that your yield on cost will be much higher a few years down the road than is indicated on the tables below.

The Zacks Rank is however better used as a short-term timing/trading tool, not as a guide towards long term investing. Still, even the longest term investor wants to avoid an immediate drop after he buys, and will enjoy a pop shortly after she puts the order in. The combination of an attractive Zacks Rank, and a low or at least moderate valuation, is what you want to look for.

If you want a bank for your portfolio, think small. A package of, say, Chemical Financial ( CHFC ), BOK Financial ( BOKF ), Peoples Bank of Ohio ( PEBO ) and Farmers and Merchants ( FMAO ) probably has just as much upside potential, and a lot less risk, than a single position in Citigroup. You will also enjoy a much nicer dividend stream along the way.

Right now, when it comes to the banks, small is beautiful. If you need size, the oligopoly nature of the credit card business means that Visa and MasterCard should be attractive long-term investments, which have the earnings estimate momentum wind at their backs right now.

Number 1-Ranked Firms

Company Ticker Market Cap ($ mil) P/E Using Curr FY Est P/E Using Next FY Est "%Ch Curr Fiscal Yr Est - 4 wks" "%Ch Next Fiscal Yr Est - 4 wks" "Current Price" Div Yield
Bok Finl Corp BOKF $3,389 12.39 11.68 1.90% -0.05% $49.52 2.22%
Credit Accept CACC $1,894 10.75 9.31 1.40% 2.38% $74.00 0.00%
Texas Cap Bcshs TCBI $960 14.99 12.31 15.73% 12.43% $25.78 0.00%
Heartland Paymt HPY $794 19.8 16.76 5.13% 4.83% $20.59 0.78%
Columbia Bk Sys COLB $646 19.67 16.96 13.66% 10.60% $16.37 1.22%
Central Pac Fin CPF $503 15.06 15.25 14.29% 2.60% $12.05 0.00%
Boston Priv Fin BPFH $497 16.91 11.39 130.17% 8.37% $6.45 0.62%
Chemical Finl CHFC $495 12.53 11.33 6.14% 3.91% $18.05 4.43%
Adv Amer Cash AEA $474 8.22 7.17 -1.60% -1.40% $7.60 3.29%
Viewpoint Finl VPFG $459 21.95 22.81 3.90% -4.15% $13.17 1.52%
First Finl-Ind THFF $425 12.62 13.19 6.89% 1.03% $32.31 2.91%
Citizens Bkng CRBC $321 N/A 6 16.90% 19.78% $8.08 0.00%
Sun Bancorp/Nj SNBC $264 N/A 47.11 8.71% 800.00% $3.18 0.00%
Enterprise Finl EFSC $240 8.91 8.83 11.67% 7.90% $13.86 1.52%
Center Bancorp CNBC $159 12.77 11.7 6.99% 3.09% $9.77 1.23%
Midwestone Finl MOFG $128 11.69 10.73 16.51% 17.23% $14.84 1.35%
Peopl Bncp-Ohio PEBO $124 13.96 10.91 26.32% 13.16% $11.73 3.41%
Heritage Commrc HTBK $121 31.32 19.45 30.15% -3.72% $4.62 0.00%
Heritage Oaks HEOP $91 39 12.55 -3.45% 1.16% $3.64 0.00%
Farmers&Merchan FMAO $84 10.69 9.25 0.00% 0.00% $17.85 4.26%
Metrocorp Bancs MCBI $82 22.93 13.76 0.00% 0.00% $6.19 0.00%
Mercantile Bank MBWM $82 11.69 10.8 54.03% 15.03% $9.50 0.00%
Intervest Bcsh IBCA $66 7.78 6.76 53.85% 64.29% $3.11 0.00%
Tower Financial TOFC $41 10.61 10.23 6.67% -2.35% $8.49 0.00%
Preferred Bank PFBC $20 19.14 11.87 200.00% 54.80% $7.66 0.00%

Number 2-Ranked Firms

Company Ticker Market Cap ($ mil) P/E Using Curr FY Est P/E Using Next FY Est "%Ch Curr Fiscal Yr Est - 4 wks" "%Ch Next Fiscal Yr Est - 4 wks" "Current Price" Div Yield
Visa Inc-A V $69,236 16.82 14.54 0.72% 0.67% $83.41 0.72%
Mastercard Inc MA $41,549 19.11 16.23 0.29% 0.35% $326.54 0.18%
Capital One Fin COF $19,660 5.93 7.21 3.60% 0.79% $42.80 0.47%
Fiserv Inc FISV $8,138 12.52 11.16 0.83% 0.95% $56.67 0.00%
Slm Corp SLM $7,410 7.65 7.14 5.28% 5.16% $14.05 2.85%
Alliance Data ADS $4,499 13.02 11.27 1.97% 2.04% $88.17 0.00%
Global Payments GPN $3,587 14.42 12.84 -0.38% 0.53% $44.65 0.18%
Total Sys Svc TSS $3,416 15.92 14.51 1.50% 0.73% $17.73 1.58%
East West Bc EWBC $2,582 11.19 9.63 2.53% 1.19% $17.36 1.15%
Wright Express WXS $1,734 12.8 10.92 0.24% 0.58% $44.91 0.00%
Webster Finl Cp WBS $1,599 12.11 11.29 7.16% 7.68% $18.27 1.09%
Umpqua Hldgs Cp UMPQ $1,262 18.35 13.58 8.11% 6.57% $11.01 1.82%
World Acceptanc WRLD $963 9.73 8.54 0.79% 0.55% $62.45 0.00%
First Fin Bk-Tx FFIN $957 14.41 13.76 2.11% 1.19% $30.44 3.15%
Cvb Finl CVBF $950 12.7 11.56 14.53% 3.97% $8.96 3.79%
Privatebancorp PVTB $740 29.52 12.85 -14.98% -19.02% $10.31 0.39%
Nbt Bancorp Inc NBTB $723 12.35 11.39 -0.97% 1.65% $20.99 3.81%
Oritani Finl Cp ORIT $709 22.37 18.26 -0.59% -1.43% $12.60 3.17%
Pacwest Bancorp PACW $642 13.9 12.86 14.82% 2.87% $18.10 0.22%
Bancfirst Okla BANF $579 13.16 12.04 -1.89% -1.57% $37.63 2.66%
S&T Bancorp Inc STBA $524 14.03 11.5 21.14% -1.22% $18.69 3.21%
Hudson Vly Hldg HVB $375 14.07 11.31 25.42% 14.64% $21.18 2.83%
Rockville Finl RCKB $287 21.11 19.23 0.00% 0.00% $9.71 2.68%
Arrow Finl Corp AROW $271 13.21 13.21 -1.64% -2.17% $23.77 4.21%
Utd Finl Bcp UBNK $251 21.83 19.7 0.35% -1.55% $15.61 2.05%
Territorial Bcp TBNK $250 18.65 17.65 0.00% 0.00% $20.83 1.73%
Trico Bancshrs TCBK $226 20.57 14.02 15.48% 10.96% $14.19 2.54%
First Long Is FLIC $224 11.19 10.22 0.33% 1.42% $25.55 3.44%
German Amer Bcp GABC $210 10.81 10.52 13.20% 9.31% $16.68 3.36%
Citizens&Nrthrn CZNC $200 9.24 9.62 5.33% 2.40% $16.45 3.65%
First Intst Mt FIBK $199 13.93 10.57 4.53% 2.94% $12.33 3.65%
Pacific Contl PCBK $166 21.31 15.67 3.50% -2.82% $9.01 0.44%
Merchants Bancs MBVT $161 11.46 10.62 0.89% 2.08% $26.02 4.30%
Bridge Cap Hldg BBNK $158 24 16.22 5.00% 3.88% $10.50 0.00%
Taylor Cap Grp TAYC $154 N/A 12.81 -6.90% 0.00% $7.60 0.00%
Bridge Bancorp BDGE $136 13.88 12.87 4.83% 3.80% $21.10 4.36%
Northrim Bcp NRIM $128 13.48 12.35 6.50% 3.21% $19.88 2.41%
First Ca Finl FCAL $97 4.75 11.18 6.47% 3.05% $3.40 0.00%
Horizon Bncp-In HBNC $92 8.79 8.57 7.10% 3.89% $27.50 2.47%
Bank Of Commrc BOCH $67 12.88 10.76 -7.58% -2.67% $3.93 3.06%
Evans Bancorp EVBN $57 11.35 9.89 -16.44% -9.09% $13.85 2.89%
Firstbank Alma FBMI $44 21.4 15.75 -5.36% 0.00% $5.67 0.71%
Somerset Hills SOMH $44 16.67 13.56 2.13% 3.51% $8.00 3.00%
Lnb Bancorp Inc LNBB $40 12.75 9.27 0.00% 0.00% $5.10 0.78%
1St Constit Bcp FCCY $36 10.42 7.89 -10.00% -9.52% $7.50 0.00%

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php
 
BANK OF AMER CP ( BAC ): Free Stock Analysis Report
 
CITIGROUP INC ( C ): Free Stock Analysis Report
 
CHEMICAL FINL ( CHFC ): Free Stock Analysis Report
 
VISA INC-A ( V ): Free Stock Analysis Report
 
Zacks Investment Research



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: BAC , C , CHFC , V

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