Analysts Todd L. Hagerman and Robert Greene of Sterne Agee authored a report, released today, that provides color on the presentations and conversations at Sterne Agee’s annual December financial services conference. As an overview they say, “No doubt, the operating environment remains challenging, but as the economy continues to grind forward, our sense at this point is the sector stands to make further, albeit moderating, gains in ’14.”

Financial services

Financial Services: Macroeconomic Projections for 2014

The analysts say all the elements seem to be falling into place for 2014 to be a year of continued recovery. “Incremental gains in employment, a steadily improving housing market, and encouraging signs in the recent budget talks have provided a bit better foundation for economic activity in ’14.”

The fact the Fed tapering is almost certainly going to be gradual and not really begin until later in 2014 is also a big positive underpinning continued economic expansion and supporting the financial services sector.

Fair valuations for financial services

Hagerman and Greene claim that despite the significant increase in P/E multiples this year, the banking sector is in general fairly valued. They argue that continued economic improvement over the course of the next 12 months gives room for more multiple expansion and continued stock price appreciation in selected issues. Their general strategy for 2014 is to stick with “high-quality” names.

Smaller banks

Although they do not specifically address small banks in this report, Hagerman and Greene do say they expect to see significant growth in specialty finance and commercial real estate lending, which should offer support to smaller lenders. They do, however, include several charts and graphs in their report that provide some insight into the top performers in the small bank sector.

Financial Services

The top five small banks for EPS improvement from 6/13 to 12/13 are PrivateBancorp Inc (NASDAQ:PVTB) (23%), Umpqua Holdings Corp (NASDAQ:UMPQ) (20%), Prosperity Bancshares, Inc. (NYSE:PB) (14%), BancorpSouth, Inc. (NYSE:BXS) (13%) and Signature Bank (NASDAQ:SBNY) (12%).