Be Selective: 5 Banks to Consider

01/05/2016 11:07 am EST

Focus: FINANCIALS

Michael Berger

President & Founder, Technical420.com

While the recent rate hike should improve market sentiment in the near-term, Michael Berger, of Technical420.com, thinks it will have a minimal fundamental impact for most banks, so he shares five names he thinks can grow regardless of the level of interest rates.

After the Shanghai Composite Index fell 7% Monday, the index continued to trade weak Tuesday morning until the Chinese Government decided to step in. The CSI 300 was down more than 2% this morning before the Chinese central bank injected 130 billion yuan ($19.9 billion) into the financial system, the most since September. China's CSI 300 Index ended the day up 0.3% higher after a late-session rally.

According to the January effect, January is supposed to be the best month of the year for the stock market. This has not been the case, so far, due to turmoil in the Middle East, weaker-than-expected manufacturing data out of China, and terror-related concerns.

Although these issues are concerning, investors can find great investment opportunities once the market finds a bottom. One of the industries we are favorable on in the first half of the year is the banking industry.

Impact of the Interest Rate Hike

The interest rate hike was the first increase since June 2006 and we expect the Fed’s pace to be gradual. With the Fed moving rates off of the bottom, we expect to see net interest margins (NIM) modestly improve during 2016. When you combine an improving NIM with mid-single loan growth, banks should generate higher net interest income during 2016.

The rate hike may cause near-term loan growth to spike as people try to secure lower rates. Although we prefer smaller mid-cap banks, loan growth has recently been stronger at larger banks. This is interesting because it is reversing a trend that started in the first quarter of 2013.

We expect to see the Federal Reserve raise rates two additional times during the first half of 2016 and twice during 2017. If the Fed freezes rates in the second half of 2016, banks could be under pressure due to the combination of a slow-moving Fed, an inflection in credit trends, and higher regulatory costs. These factors would cause Wall Street firms to lower earnings expectations in the second half of 2016.

Banks We Are Favorable on

We continue to prefer smaller mid-cap banks that are returning capital to shareholders, focused on a differentiated market (i.e. Silicon Valley), and have a currency advantage. While the recent rate hike should improve market sentiment in the near-term, it will have a minimal fundamental impact for most banks. The Fed’s pace of future rate hikes is a major driver of the impact on bank’s income statements.

During 2016, we believe that investors must be selective and we prefer banks that can grow regardless of the level of interest rates. We also prefer banks who have proven to be successful at making accretive acquisitions. We like Citigroup (C), BofI Holding, Inc. (BOFI), Northern Trust Corporation (NTRS), SVB Financial Group (SIVB), and Bank of the Ozarks, Inc. (OZRK).
 
Michael Berger, Founder and President, Technical420.com

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