Zacks Industry Outlook Highlights: Financial Services, Oritani Financial, S&T Bancorp, Fidelity Southern and Western Alliance Bancorporation

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Dec 04, 2014, 09:30 ET

CHICAGO, Dec. 4, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Banks, pt. 2, including Financial Services Corp. (Nasdaq:EFSC-Free Report), Oritani Financial Corp. (Nasdaq:ORIT-Free Report), S&T Bancorp Inc. (Nasdaq:STBA-Free Report), Fidelity Southern Corporation (Nasdaq:LION-Free Report) and Western Alliance Bancorporation (NYSE:WAL-Free Report).

Industry: U.S. Banks, pt. 2

Link: http://www.zacks.com/commentary/35730/us-banks-with-growth-potential

The FDIC's "Problem List" contained 329 names as of Sep 30, 2014, down from 354 as of Jun 30, 2014. This is the lowest level since 305 in the first quarter of 2009 and represents a 63% decline from the post-crisis high of 888 as of Mar 31, 2011. This reflects improvement no doubt, but the number looks extremely high considering the occurrence of the financial crisis six years back. There were only 76 banks on the Problem List at the end of 2007, just before the crisis.

Considering the recovery witnessed by the economy and stock markets so far, the number of problem banks ought to have been much less. This indicates that the industry is still fraught with trouble.

However, 14 banks failed during first nine months of 2014 compared with 22 failures in the same period last year. Total 24 banks failed in 2013 (versus 51 in 2012 and 92 in 2011) and a lesser number is expected in 2014. Though the pace of bank failures has been decelerating, the industry is still to see an average failure of just four or five banks annually, which would indicate its maximum strength.

"Too-Big-To-Fail" Notion About to End

Mega banks have been benefiting from lower funding and operating costs since the financial crisis six years ago. This is because of the impression that the Federal Reserve will always protect these banks from failing in case of any major financial trouble.

However, the advantages have been waning in recent years. The regulatory changes, in particular the 2010 Dodd-Frank law, made these systematically important banks self-sufficient (in terms of capital reserves) to some extent to endure any further crisis. So the likelihood of a bailout is less now.

Further, a new set of rules put forth by the Financial Stability Board (FSB), expected to take effect in 2019 following the G2O leaders' endorsement, would make the "too big to fail" notion a thing of the past. The rules would require the world's 30 so-called "systemically important" banks to hold up to one fifth of their risk-weighted assets in the form of debt or equity. This buffer would help bolster these banks in case of any risk of failure.

Though the biggest banks will continue to enjoy low borrowing costs and take bigger risks until these rules are implemented, the advantages should wane with time.

Stocks Worth Betting On Now

As you can see, there are plenty of reasons to be optimistic about the U.S. banking industry now. So one may consider buying some bank stocks that promise better performance based on their strong fundamentals and a favorable Zacks Rank.

Specific banks that we like with a Zacks Rank #1 (Strong Buy) include Enterprise Financial Services Corp. (Nasdaq:EFSC-Free Report), Oritani Financial Corp. (Nasdaq:ORIT-Free Report), S&T Bancorp Inc. (Nasdaq:STBA-Free Report), Fidelity Southern Corporation (Nasdaq:LION-Free Report) and Western Alliance Bancorporation (NYSE:WAL-Free Report).

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