CHICAGO, Aug. 29, 2012 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Banks, including Enterprise Financial Services Corp. (Nasdaq:EFSC), Heartland Financial USA Inc. (Nasdaq:HTLF), Taylor Capital Group Inc.(Nasdaq:TAYC), Access National Corp.(Nasdaq:ANCX) and BofI Holding Inc. (Nasdaq:BOFI).
There are several macroeconomic factors that may weigh on the profitability of the U.S. banks. The most crucial among these is the uncertain outlook for the U.S. economy.
Though improved economic data such as steady consumer spending and relatively lower unemployment point towards optimism, the economy has witnessed a lot less momentum in the first half of 2012 than was anticipated. Concerns have crept up in the slothful stock market, exacerbated by ongoing concerns related to the European debt crisis.
Though the U.S. commercial banks appear to have significant direct and indirect exposure to Europe, the potential costs are expected to be manageable. However, if the crisis deepens, there will be significant impact on worldwide capital markets, and the U.S. will not be left unscathed. Consequently, U.S. banks would then face increased challenges.
On the other hand, the extremely low interest-rate environment is another manifestation of this uncertain macro backdrop. Concerns about European finances and soft U.S. growth prospects have made treasury instruments the choice of safe asset class. As a result, yields on benchmark treasury bonds have hovered at low levels.
Bank Failures Continue
While the financials of a few large banks are stabilizing on the back of economic stability and increasing dependence on noninterest revenue sources, the industry is still on shaky ground. The sector presents a picture similar to that of 2011, with nagging issues like depressed home prices, still-high loan defaults and unemployment levels troubling such institutions.
The lingering economic uncertainty and its effects also weigh on many banks. The need to absorb bad loans offered during the credit explosion has made these banks susceptible to severe problems.
Furthermore, government efforts have not succeeded in restoring lending activity at the banks. Banks are also trying to boost lending activity by easing lending standards, but sufficient loan growth is not expected anytime soon given the weak real-estate market. Lower lending will continue to hurt margins, though the low interest rate environment should be beneficial to banks with a liability-sensitive balance sheet.
Increasing loan losses on commercial real estate could trigger many more bank failures in the upcoming years. However, considering the moderate pace of bank failures, the 2012 number is not expected to exceed the 2011 tally. From 2012 through 2016, bank failures are estimated to cost the Federal Deposit Insurance Corporation (FDIC) about $12 billion.
Eventually, the strong banks will continue to take advantage of strategic opportunities, with the big fish eating the little ones.
Clearly, the banking system is still not out of the woods, as there are several nagging issues that need to be addressed. Banks will also have to stay away from risky activities for immediate benefit.
Given the progress in the industry so far, it seems that banks may encounter several disappointments ahead before gaining investors' confidence. In fact, the negatives could offset the positive developments to a great extent.
Specific banks that we like with a Zacks #1 Rank (short-term Strong Buy rating) includeEnterprise Financial Services Corp. (Nasdaq:EFSC), Heartland Financial USA Inc. (Nasdaq:HTLF), Taylor Capital Group Inc. (Nasdaq:TAYC), Access National Corp. (Nasdaq:ANCX) and BofI Holding Inc. (Nasdaq:BOFI), to name just a few.
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