Near-Term Prospects for Savings & Loan Industry Appear Bleak

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 the firms operate similarly to commercial banks by providing various banking services, such as checking and savings accounts, these 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.

One of the prominent stocks in this industry is Citizens Financial Group, Inc. (CFG).

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 aided the U.S. savings and loan industry. Rising income of Americans, along with lower rates, has supported the housing market by fueling demand for refinancing of residential mortgages. Lesser regulatory supervisions 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, the Fed’s rate cuts this year have spurred demand in loans as lower rates attract consumers. Moreover, the recent mortgage-rate declines will likely push refinancing activities higher. Particularly, strong consumer loan growth in anticipated, partly offset by weakness in revolving home equity, commercial and industrial (C&I) and overall real estate loans, along with rising deposit costs. Nevertheless, 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, in order 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 Bleak Prospects

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

The Zacks Savings and Loan industry currently carries a Zacks Industry Rank #143, which places it at the bottom 43% 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.

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 2.2%, the Zacks S&P 500 Composite and Zacks Finance Sector have rallied 16.6% and 0.8%, 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 1.5X, above the median level of 1.43X, over the past five years. This compares with the highest level of 9.72X and lowest level of 1.14X 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 11.56X and the median level is 9.00X.

Price-to-Tangible Book Ratio (TTM)


The Zacks Finance sector’s trailing 12-month P/TBV ratio of 3.87X and the median level of 3.48X for the same period are above the Zacks Savings and Loan industry’s respective ratios.

Price-to-Tangible Book Ratio (TTM)


Bottom Line

Though savings and loan stocks will likely continue benefiting from lower rates, a stabilizing housing market and increasing consumer income, intensifying competition from similar companies might deter these positives to some extent.

However, keeping the long-term growth prospects in mind, investors can take advantage of the cheap valuation, and bet on a few savings and loan stocks that have a strong earnings outlook.

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

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here)

3 Savings and Loan Stocks to Bet on

People's United Financial, Inc. (PBCT): The stock of this Bridgeport, CT-based bank has appreciated 16.6%, year to date. The Zacks Consensus Estimate for the ongoing-year EPS has been revised 1.5% upward in 30 days’ time.

Price and Consensus: PBCT


Guaranty Federal Bancshares, Inc. (GFED): Shares of this Springfield, MO-based bank have gained 11.1%, year to date. The consensus EPS estimate for the current year has been revised around 1% upward, over the last 30 days.

Price and Consensus: GFED


Northwest Bancshares, Inc. (NWBI): The consensus EPS estimate for this Warren, PA-based bank has moved 1.9% north for 2019, over the past 30 days. The stock has rallied 1% year to date.

Price and Consensus: NWBI


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People's United Financial, Inc. (PBCT): Free Stock Analysis Report
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Citizens Financial Group, Inc. (CFG): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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