Bank stocks were climbing on good economic news during most of the last half of 2012. But all was not great in the land of bank stocks. For one, pricing is all across the board, heavily influenced by the region of the country where the bank resides. The northeast and western states have much stronger bank stock prices than the southeast, in part because of the vibrancy of their economies. Overall, bank stock valuations are reflecting diminished profitability throughout the industry. Return on equity and return on assets fell during the third quarter for nearly every size category of bank. With the Federal Reserve planning to keep interest rates low at least until the employment situation improves, that could mean low interest rates for some time to come. The number of new bank charters has been nonexistent, a reflection of how tough it is to deploy capital in an industry where loan demand is still hobbled.
Stephen Geyen is a vice president and analyst at Stifel Nicolaus in Minneapolis, where he covers Midwest banks.
What is your prediction for bank stocks in 2013?
I would expect 8-10 percent return for shareholders in 2013 for the small and mid-cap banks I cover, a return essentially in line with the median expected growth in the core value of the typical banking franchise. I cover Midwest banks.
What will be the impact of an extended period of low interest rates on bank stocks, now looking at the possibility of low rates through 2015?
All banks will see margins come under pressure during the next couple years if rates stay where they are. Most banks will be less profitable. The exceptions will be those banks that can grow earning assets and fee income.
What are your favorite stocks?
My top picks are [the $23-billion asset Green Bay, Wisconsin-based] Associated Banc-Corp and [the $3-billion asset Warsaw, Indiana-based] Lakeland Financial Corp. The two banks are exceptionally well managed, have very strong capital and credit that is exceptionally good. Associated Banc-Corp is a turnaround play that is probably in the middle innings of a significant turnaround with the hiring of Phil Flynn [as president and CEO]. Lakeland is a very profitable bank. They are generating a return to common shareholders that is 25 percent higher than their peer group.
For more data on bank stocks, see Analyst Forum at BankDirector.com.
Anthony Polini, an analyst at Raymond James & Associates, said in September that people needed to buy bank stocks during the latter stages of a recession to mid-stage recovery. He also recommended the stock New York Community Bancorp, a $44.1-billion asset bank that has a 7.5 percent dividend yield. New York Community Bancorp’s stock has remained about the same since mid-September through mid-December at about $13.20 per share. Does he still feel that way?
“We are still recommending high quality, high-yielding names,’’ he says. “We are not 100 percent sure the economy is going to move in the right direction. We still have a strong buy rating on New York Community Bancorp and more defensive names. We need to create 300,000 jobs, not 100,000 jobs [in the economy].”