Hilary Kramer has 30 years of experience on Wall Street; she was an analyst and investment banker at Morgan Stanley and Lehman Brothers. Here, the editor of the leading growth and income newsletter Value Authority, reviews two regional banking stocks with upside potential.
Valley National Bancorp (VLY) — a regional bank based in Wayne, New Jersey — reported a third-quarter EPS of $0.20, which was $0.02 below expectations and below the $0.21 realized in the second quarter of this year. The main culprit behind the disappointment was the company’s investments to improve efficiency.
However, this spending should pay off in the long run as the company expects to drive down its expense-to-revenue ratios, which currently are at 57.85% but should fall to 50% by 2020.
Valley National’s stock, like those of all regional banks, has taken a significant hit from concerns that interest margins will be hurt by the flattening yield curve, and that slowness in the housing market raises the risks of higher credit costs.
For now, interest margins remain stable, but considering the company posted strong 12% loan growth, it would have expanded sharply if not for an increase in funding costs. Credit costs are under control for now and, in fact, declined in the quarter.
At this point, a lot of potential bad news is priced into the stock, and future factors that potentially negatively impact earnings could be offset, in large part, by the expected improvement in the expense ratio. Buy VLY. My new buy under price is $10.50, while my target is now $13.
First Hawaiian Bancorp (FHB) reported in line a third-quarter 2018 EPS of $0.50 versus $0.42 a year ago. The improvement came strictly from a lower tax rate and a reduced share count, as results were hurt by loan prepayments and higher wages for employees.
However, while loan growth was flat from the second quarter due to the prepayments, loan production was strong, and the company continues to look for 5% loan growth next year.
With the stock now at less than 12X forward EPS with a dividend yield of 4.1%, the shares are very cheap, and I look for strong returns over the next year if the economy remains healthy. Buy FHB. My new buy under price is $26 and my target is now $30.
