Ahead of the presidential election, I chose a financial stock for our October Spotlight Stock in Wall Street’s Best Investments newsletter. And boy, has that ever been a prescient pick!
The election of Donald Trump has not only created a mega-rally in the broad markets, it has been absolutely tremendous for financial stocks. The primary reason is that Trump is expected to eliminate several post-recession financial regulations. And that has bankers shouting with glee, rubbing their hands at the prospect of higher profits due to less government interference.
Fund managers, who had been sitting on mountains of cash, pre-election, significantly reduced their cash cushions—about 5%—in November, according to a Bank of America survey, and began buying both financial stocks and healthcare stocks (betting on an Obamacare repeal). As well, investors are rushing to buy call options on banks—including our October Spotlight Stock, Zions Bancorp (ZION).
Lots of Reasons to Love Regional Banks
Zions is a regional bank, and regional banks have long been some of my favorite investments. Here’s why:
Transparent financials. For the most part, you won’t find fancy derivatives, shifting of funds between subsidiaries or other complex financial machinations in the financial statements of small- and mid-cap banks.
Large insider ownership stakes. Last year, NYU Stern School of Business conducted a study of insider ownership in various industries. Their report showed that on average, insiders at regional banks own some 12.37% of their bank’s stock, whereas at money center banks, that percentage declines to just 0.29%. That makes a difference in how a bank is run—the old “putting your money where your mouth is” is extremely important in small communities. The bank managers work there, live there, and have a vested interest in keeping their institutions profitable and free from scandal.
Lower non-performing assets. I took a look at the list of non-performing loans compiled by BankRedData.com, and was totally unsurprised to see that the small- and medium-sized regional banks—for the most part—had nonperforming loans ratios of less than 2.5%. In contrast, Wells Fargo’s (WFC) was 6.67%.
Takeover possibilities. Regional banks are favorites when the big banks get hungry for more deposits and loans. A 2015 study on banking M&A by FIG Partners revealed that of the 250 deals that year, the average size was $742 million in assets, and that the premium to investors for the takeover was more than 30%.
On the Rise, But Further to Run
Zions was recommended by our contributor, Richard J. Moroney, editor of Dow Theory Forecasts. The bank has boldly expanded, but retained its conservative management style. Richard had this to say about Zions:
“A series of acquisitions over the past 20 years has helped Zions push into 11 states in the West and Southwest. After completing these deals, Zions often keeps the local brand and management team in place so its branches retain the feel of community banks.
“The financial stock has returned 11% including dividends in the past year, higher than any other stock in the S&P 500 regional-bank industry, which has averaged a flat return. That rally has pushed Zion’s trailing P/E ratio to 18, above its 10-year average of 17 and the industry average of 14. But the strong share-price action also coincides with superior operating momentum, as Zions delivered 13% higher per-share profits over the past 12 months (versus its industry average of 10%) on 9% revenue growth (8%). Zions, earning an Overall rank of 97, is a Buy and a Long-Term Buy.
“Following the 2008 financial crisis, Zions clamped down on risk by keeping an unusually high proportion of its cash on hand and refusing to issue long-term loans at low interest rates. Management’s conservative stance caused loan growth to lag many other regional banks. In the past couple of years, Zions has begun to open up its purse strings. Its loan portfolio grew 6% in the past year, though it still represents a conservative 83% of deposits, below the industry average of 89%. Management expects loan growth to keep accelerating through 2017. Zions’ portfolio includes commercial (52%), commercial real estate (27%), and consumer (22%) loans.
“Oil-and-gas loans currently account for about 6% of the bank’s total portfolio. The credit quality of energy companies concerns investors, but many of Zions’ loans are backed with collateral that assumed oil at $30 per barrel. The rebound in oil prices leaves these loans well reserved.
“Improving efficiency, higher loan growth, and the likely scenario of rising interest rates should boost the bank’s profitability in the next couple years. Wall Street expects Zions’ per share profits to climb 20% in the 12 months ending June 2017, the strongest growth in its industry.
“Analyst estimates have risen over the last 90 days. Zions boosted its dividend 33% in July and 51% annually over the last three years, more than double the industry average. Management also plans to repurchase up to $180 million of stock, or 3% of outstanding shares, over the next 12 months.”
Richard’s words in October were very perceptive. Since then, Zion’s stock has zoomed from $31 to $43 per share. And other analysts have jumped on board, including these companies that have recently upgraded the shares:
- UBS: Sell to Neutral 1/11/2017
- JP Morgan: Neutral to Overweight 1/5/2017
- FBR & Co.: Mkt Perform to Outperform 12/20/2016
- BofA/Merrill: Underperform to Neutral 12/15/2016
- Jefferies: Hold to Buy 11/28/201
The bank is due to report its fourth-quarter 2016 earnings results on January 23, 2017. Right now, analysts are forecasting EPS of $0.51. Last quarter, Zions earned $0.57, seven cents more than the consensus estimate. Wall Street believes Zion will grow 21% this year and 25% in 2018.
And although the financial stock has had a nice run, some analysts believe it can continue to rise to $50 in the next 12 months. With a pullback in regulation almost certain and interest rates on the rise, the shares could climb even further.