Loan growth has been difficult for banks to achieve, but it could be the catalyst for their next surge.
Banks were one of the hottest sectors in 2021, with the
SPDR S&P Bank
exchange-traded fund (ticker: KBE) up 31.7% year-to-date. The gain, 20 percentage points higher than the S&P 500 Index, is due to a reopening of the economy, robust capital markets and higher bond yields, among other factors. Banks, however, have been on hold since March, waiting for something to grab investors’ attention.
P / TBV = Price at tangible book value; E = estimate
Sources: FactSet; corporate reports
That something is the growth of loans, the bread and butter of the bank. Lending has been surprisingly lukewarm despite the recovery. Many households and businesses are teeming with savings and stimulus packages, which will take some time to spend. But it will be. For now, investors should view banks as
Apogée Financial Partners
PNC Financial Services Group
(PNC), which operate in high growth regions.
Without a doubt, the United States has been inundated with money. S&P 500 companies, excluding financial services, had nearly $ 2 trillion in their balance sheets at the end of 2020, according to data from the S&P Dow Jones indices, or 25% from the previous year. As a result, bank loan balances fell 1.2% in the first quarter of 2021, compared to the previous 12 months, according to the Federal Deposit Insurance Corp. Quarterly Banking Profile. In the three years leading up to the pandemic, loan balances typically grew by around 4% per year.
Some see lackluster loan growth as the new normal in the US banking industry. Baird analyst David George says any pick-up in loan growth will be dampened, creating a difficult environment for banks looking to build loan portfolios. “We continue to expect core loan growth to be weak in the near term as businesses use large cash buffers to finance their working capital and capital expenditure needs before borrowing from banks, “he wrote.
Others are more optimistic. Truist Securities analyst Jennifer Demba sees lending pipelines grow in the second half of 2021 as the economy recovers and the recovery fades. “We’re going to need to see confidence in sustainability in [economic] normality, ”she says.
Even bank CEOs cite normalcy as they reflect on what will increase lending again. “[There’s] hesitation while waiting for more certainty about the pandemic, ”PNC CEO William Demchak said during a call to an analyst in April. “But when it does, and it does, it has to happen almost mechanically, you’ll see some pretty sizable loan growth. ”
Normalcy comes sooner in some parts of the United States than in others. Over the past year, the Southeast and Texas have seen an influx of newcomers as the pandemic makes less densely populated areas more attractive.
Allegiance Bancshares of Houston is a good example. Keefe, Bruyette & Woods analyst Brady Gailey notes that management felt optimistic about loan growth, given the migration to Texas. The bank expects single-digit loan growth this year, before reaching average numbers in 2022. It has been helped by 4,000 new paycheck protection program clients over the past year , representing more than $ 1 billion in loans; about a quarter of its PPP customers do other business with Allegiance. It also gained 1,800 non-PPP customers. The stock recently closed at $ 40.56.
Nashville-based Pinnacle Financial is expected to benefit from a return to tourism and other activities in the city, and the bank feels more confident about loan growth. “There is dynamism in these markets, which gives us an advantage in terms of loan demand,” said Terry Turner, CEO of Pinnacle.
Pinnacle expects high-digit loan growth this year, thanks to the return of face-to-face meetings. Its loan portfolio grew by $ 2.7 billion, or 13.2%, in the first quarter of 2020, largely thanks to PPP loans. Excluding these loans, the bank said quarter-over-quarter loan growth stood at an annualized rate of 7.2%. Demba has a buy rating and a target price of $ 100 on the stock, up 11% from a recent $ 90.
PNC, based in Pittsburgh, has a geographic footprint that spans the east coast. PNC benefits from a well-heeled northeast base, some of whom have headed south but remain clients.
PNC noted that clients have started to tap credit lines, a good indicator of loan growth. The bank’s loan balances fell 2% in the first quarter from the previous, and management expects loan growth to pick up in the second half as businesses rebuild their inventories. With its large footprint, PNC is well positioned to compete with the big banks, notes Evercore ISI analyst John Pancari, who recently launched a hedge with an outperformance rating and a price target of $ 215, up from $ 215. 11% from a recent $ 194.
And sometimes all a bank needs are affluent customers who need to borrow. Santa Clara, California
SVB Financial Group
(SIVB) —formally Silicon Valley Bancshares — is a large tech lender that has benefited from the boom in growing companies. SVB saw its lending grow 6% quarter over quarter, largely due to fundraising and private equity investments. He expects loan growth in 2021 to be between 30% and 30%. Demba, who sees SVB as an “idiosyncratic” choice given its geography, has a buy rating on the stock despite gaining 167% over the past 12 months. She has a target of $ 625 on SVB shares, up 6% from Friday afternoon’s $ 588.
Write to Carleton English at [email protected]