Energy Saps Banking Sector—One Stock Seriously Undervalued

02/10/2016 9:05 am EST

Focus: FINANCIALS

Michael Berger

President & Founder, Technical420.com

Although weak oil prices continue to serve as a headwind for bank stocks, Michael Berger of Technical420.com thinks this risk is more than priced into the banking industry, so he highlights one of his favorite banking stocks that has fallen more than 31% during 2016 and shares are trading in oversold territory.

As low oil prices continue to negatively affect the United States energy industry, bank stocks with energy exposure remain in focus as credit risk concerns continue to increase. Although not all energy loan portfolios are created equal, weak oil prices continue to serve as a headwind for bank stocks.

This headwind, coupled with a weak stock market has caused a number of high quality bank stocks to sell-off. Although the risks associated with energy loans vary, the market is concerned about the extent of a bank's exposure.

Not All Energy Portfolios Are Created Equal

As we said before, not all energy loan portfolios are created equal and different sub-sectors of the energy sector are riskier than others.

2016 has been a rough start for the banking industry and we have seen the Financial Select Sector SPDR ETF (XLF) fall more 14% during this time. This sell-off has created a great opportunity for both traders and investors.

Big Caps, Big Exposure

The four biggest banks in the United States are JP Morgan Chase & Co. (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), and Citigroup, Inc. (C). Out of these four, C is the most exposed to the energy sector (followed by BAC, WFC, and JPM).

Out of these four, WFC has been the top performer during 2016 with shares down 7.2%. This drop seems pretty minor when compared to C and BAC, which are down more than 29%. JPM is the only bank out of these four to have less than 2% exposure to the energy sector and shares have still fallen more than 16%.

Finding Value on Weakness

Although the low oil price environment will likely get worse before it gets better, we believe this risk is more than priced into the banking industry. One of our favorite banking stocks, SVB Financial Group (SIVB), has fallen more than 31% during 2016 and shares are trading in oversold territory.

SIVB reported solid fourth quarter results in late January and loan growth exceeded forecasts, while investor fears of escalating credit problems were not realized. Additionally, management improved 2016 guidance for loan growth, net interest income, and core fee income. We believe SIVB has a best-in-class loan portfolio and its above average EPS growth, coupled with its asset sensitivity makes them deserving of a premium valuation.

Michael Berger, Founder and President, Technical420.com

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