What are we looking for?
U.S. regional banks poised to grow in light of future interest rate increases.
In her speech last week in Jackson Hole, Wyo., Federal Reserve chair Janet Yellen laid out her case for a growing U.S. economy based on labour market growth, positive economic indicators and slow inflation. Based on this, the prospect of an interest-rate increase in 2016 appears much higher than just two weeks ago. A key beneficiary of an increasing rate environment will be U.S. banks who profit from the net interest-rate spread. Smaller regional banks are interesting because they are U.S. focused, without the international operations that many larger banks have.
The screen
We will be using Recognia Strategy Builder to search for U.S. regional bank stocks offering reasonable valuations and strong prospects for earnings growth.
We begin by setting a minimum market cap threshold of $1-billion (U.S.). This screens out approximately 75 per cent of the smallest banks from our list.
Next, we will look for stocks with above-average prospects for growth. We will pick stocks that have analyst ratings of either buy or strong buy. In addition, we will select only stocks with projected earnings-per-share growth rates this year of 10 per cent or more over last year.
Finally, to ensure we don't overpay for our investments, we will screen for stocks with forward price-to-earnings ratios of 18 or less.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Citizens Financial Group is the largest bank on our list with a market cap in excess of $12.8-billion. Based in Providence, R.I., Citizens Financial Group operates mainly in the U.S. Northeast. Until 2015, Citizens Financial Group was owned in part by Royal Bank of Scotland. On July 21, Citizens announced second-quarter results that beat analyst expectations for both revenue and earnings. The stock is up approximately 14 per cent since that date.
The highest EPS growth rate on our list belongs to Ameris Bankcorp at 66.6 per cent. Like Citizens, Ameris also had good financial results in late July contributing to a 14-per-cent gain in the stock price. Founded in 1971 in Moultrie, Ga., Ameris focuses on mortgage lending and consumer banking services.
Banc of California (formerly Pacific Trust Bank) operates 40 branches primarily in Southern California. Like the other regional banks on this list, Banc of California reported excellent second-quarter results in late July, which resulted in a strong stock price rally in the subsequent weeks.
Historical performance
Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 15.1 per cent annualized return compared to 13.1 per cent for the S&P 500 index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.