CHICAGO, Dec. 13, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. U.S. Banks, including BofI Holding, Inc. (Nasdaq:BOFI-Free Report), TriCo Bancshares (Nasdaq:TCBK-Free Report), First Interstate Bancsystem Inc. (Nasdaq:FIBK-Free Report), Southside Bancshares Inc. (Nasdaq:SBSI-Free Report) and American National Bankshares Inc. (Nasdaq:AMNB-Free Report).
Industry: U.S. Banks
During the third quarter of 2013, failure of the FDIC-insured banks lessened to just 6 from 12 in the year-ago quarter. In total, 23 banks failed in the first nine months of the year compared with 50 in the same period a year-ago. Moreover, as of Sep 30, 2013, the number of banks on the FDIC's "Problem List" declined to 515 from 553.
The slower pace of bank failures and decline in problem banks indicates continued improvement in the sector. Though there will be fewer bank failures in 2013 compared to 2012, the industry is still to see an average failure of just four or five banks annually, which would indicate maximum strength in the industry.
Growing Faster Will Not Be Easy
As the gap between loss provisions and charge-offs is gradually narrowing, reduction in provisions is not likely to remain a significant earnings driver in the upcoming quarters. So banks are trying to look at other areas -- primarily non-interest income and operating costs. But opportunities will be curbed by regulatory restrictions and a still shaky economic recovery.
Efforts to cut interest expenses and take additional risks to improve net interest margins could be marred by a still-flat yield curve. Further, shifting assets to longer maturities for strengthening net interest margin could backfire with the expected increase in interest rates in the near term.
Conversely, increasing revenues through non-interest sources -- charges on deposits, prepaid cards, new fees and higher minimum balance requirement on deposit accounts -- could be hampered by regulatory actions and soaring overhead. However, with a rebound in capital market activity, the propensity to invest in the market has increased, which may lead to more non-interest revenue sources.
Eventually, banks will have to take resort to cost containment through job cuts and reduced operational size. But any cost-cutting measure will act as a defense. The industry witnessed more than half a million layoffs over the last five years just to stay afloat, and the story will continue.
Balance Sheet Recovery on Track
Steady deposit growth from lack of low-risk investment opportunities is quite possible, but high charge-offs and delinquency rates plus weak demand could keep loan growth under pressure in the near to mid term. Though banks are easing lending standards to accelerate loan growth, credit quality concerns are likely to mar the effort.
Moreover, though growth in gross domestic product (GDP) and reducing unemployment will help banks strengthen their balance sheets, expected unrealized losses on underlying securities due to rising interest rates will act as dampeners.
However, banks are trying to reorganize risk management practices to address potential solvency issues from rising interest rates. Efforts are also being given to address asset-quality troubles by divesting nonperforming assets. Yet, we don't expect balance-sheet strength to return to pre-recession peak anytime soon.
Though improved performances by banks seem already priced in and significant concerns remain, the sector is unlikely to disappoint investors in the upcoming quarters.
Specific banks that we like with a Zacks Rank #1 (Strong Buy) include BofI Holding, Inc. (Nasdaq:BOFI-Free Report), TriCo Bancshares (Nasdaq:TCBK-Free Report), First Interstate Bancsystem Inc. (Nasdaq:FIBK-Free Report), Southside Bancshares Inc. (Nasdaq:SBSI-Free Report) and American National Bankshares Inc. (Nasdaq:AMNB-Free Report).
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SOURCE Zacks Investment Research, Inc.