Pacific and Southwest banks saw a rally at the end of 2016 following the presidential election. Analysts say investors anticipated the new administration to favor lower corporate tax rates and decreased regulation. Interest rates were also expected to rise, which analysts say attracted investors to financials as they say earnings estimates would be on the rise.
Analysts say tax cuts are important in the short term, but they say that for the intermediate term, many of the anticipated changes would already be priced into stocks, so for a bank to outperform the group it would have to have better loan growth than expected, among other things. Another factor to watch is mortgage banking, as the gain on sale margins could be under pressure through the year. And on the commercial real estate side, analysts expect the segment to be less of a growth driver in 2017, as banks seem to be focusing away from CRE.
One of the biggest beneficiaries of reduced regulation would be small banks, analysts say, as these are the ones that spend the most on compliance as a percentage of their total revenue.
Analysts say the increased valuations levels could hold if the operating environment turns out as positive as investors seem to expect. Higher interest rates are likely, which are expected to result in higher earnings estimates, and lower taxes are possible, which could result in higher earnings estimates as well. Another factor analysts discuss is the flow toward financials from other sectors, which analysts are keeping an eye on. Overall, analysts think current valuations are reasonable.
Analysts say the economy in the United States continues to show gradual growth with more jobs being created. The quality of jobs is not the best, they say, but the unemployment rate continues to drift lower, which is beginning to translate into higher wages.
Analysts are keeping an eye on credit trends, since it has been a while since the last credit cycle decline. Any uptick in credit issues and credit weakness would put pressure on earnings, which is expected to result in weaker stock prices.
Banks in the Texas have seen their fortunes tied to the price of oil. Their stock prices have been strongly correlated to crude prices, analysts say, though they don’t expect this correlation to wreak havoc in 2017, with analysts estimates for the price of oil ranging between $50 and $60. But as oil has shown in the past, the price could change drastically and unexpectedly, and analysts say a drop below $40 would be negative for Texas bank stocks.
The West Coast economy, especially Portland and Seattle, has done well over the past year, analysts say. Analysts say this has enabled banks to have for the most part fairly solid loan growth, clean credit metrics and good profitability metrics in general. Analysts say the region has a diversified lending base, and banks have been lending to mostly small and medium businesses. In California, analysts say the region could be affected if strong tariffs are imposed, as this could hurt import and export operations, as well as port activity.
Full report available here.
Interview Highlights: Jacquelynne Chimera Bohlen of Keefe, Bruyette & Woods, Inc. on Pacific and Southwest Banks
January 30, 2017
Interview Highlights: Bryce Rowe of Robert W. Baird & Co. on Pacific and Southwest Banks
January 30, 2017
Interview Highlights: Aaron James Deer of Sandler O’Neill + Partners L.P. on Pacific and Southwest Banks
January 31, 2017
Interview Highlights: Brett Rabatin of Piper Jaffray & Co. on Pacific and Southwest Banks
January 31, 2017
Report Overview: Northeast, Mid-Atlantic and Southeast Banks
January 03, 2017
