A January 5th Industry Report from research firm Sterne Agee focuses on the banking industry, and offers a relatively rosy outlook for the sector in 2015, especially small and mid-cap banks.
In the introduction to their report, SA analysts Terry McEvoy and colleagues suggest: “While the direction of interest rates and slope of the yield curve remain the largest variable to future bank earnings and profitability, we feel investors need to be aware of company-specific data such as exposure to energy lending, consumer banking fees, deposit composition, capital return expectations, auto lending, normalizing credit costs, and M&A activity.”
Bank stocks lagged S&P 500 in 2014
The Sterne Agee report highlights that S&P Regional Bank Index and the Nasdaq Bank Index bank stocks were beaten by the S&P 500 by 290 bps and 855 bps respectively in 2014. Of note, this comes after two back-to-back years of outperformance for the bank sector. Regional bank stocks have lagged the S&P 500 seven times over the last decade. The best performing sectors in 2014 were universal banks and small-cap banks.
Earnings growth and lending environment favors small banks
McEvoy et al.project annual earnings per share growth of 9.2% in 2015 in the Sterne Agee bank universe compared with analyst consensus growth of 8.9% for 2014. They argue that EPS growth in 2015 is likely to be a function of 6.5% revenue growth vs. 3.4% expense growth, with positive operating leverage pushing the efficiency ratio down around 200 bps during the year. The SA analysts also note that smaller banks (assets under $10 billion) are expected to post the strongest EPS growth at 9.5% compared to 4.5% at the larger banks (assets over $50 billion).
The SA analysts are modeling average loan growth of 10% in 2015 for stocks in their universe, with period-end growth of 8.2%. Consumer auto lending will be strong, and other drivers of growth the C&I and commercial real estate portfolios will also remain drivers of growth. Loan growth projections for small banks under $10B in assets is 8.2% in 2015 reflecting lending team hires, market share gains, and recently closed or pending acquisitions. Projections for loan growth at banks greater than $50 billion in assets is 6.1% in 2015.
Bank stocks currently rated as Buy by Sterne Agee
Large cap asset-sensitive banks likely to profit from interest rate increases in 2015 include Comerica Incorporated, East West Bancorp, Fifth Third Bancorp and SunTrust Banks. Asset-sensitive mid cap banks include Popular, BOK Financial, PacWest Bancorp, PrivateBancorp and UMTF; and asset-sensitive small cap bank names include Meta Financial, CenterState Banks. Columbia Banking System, Hanmi Financial, Hilltop Holdings, NBCB, Old National Bancorp and Sun Bancorp.