With the prospect of inflation running hotter than it has in many years, how should stock investors react? Traditionally, many assets that are best-suited for income and capital preservation goals perform better in times of inflation, notes Doug Gerlach, editor of SmallCap Informer.
Banks and insurance companies tend to benefit from the rising interest rates that accompany inflation. Regional banks in particular (those that still make money on the business of banking instead of by charging fees) can see their profitability increase as rates increase.
Well-managed banks that have been able to churn out profits in low interest rate environments will be breathing a sigh of relief as rates rise and their margins can expand. Our latest featured recommendation is Glacier Bancorp (GBCI), which currently operates 17 different community-focused bank divisions in 255 locations across Montana, Idaho, Utah, Washington, Wyoming, Colorado, Arizona, and Nevada.
The hybrid community bank/regional bank model allows the bank to maintain personal customer relationships with individuals, small to medium-sized businesses, and community organizations, but backed with the financial resources of large holding company. Commercial real estate makes up the lion’s share of its loan portfolio at 61%, and other commercial loans add up to 23%.
Its latest purchase — its 24th — was Altabancorp, the largest community bank headquartered in Utah with $3.5 billion in assets. Glacier targets the region of the U.S. that includes the Rocky Mountains to the western Great Plains, from Canada to Mexico.
Management believes that its company footprint covers some of the best growth markets in the country and expects to continue to acquire community banks in the region.
Since 2012, Glacier has grown revenues at an average annual rate of 11.4% and EPS at an average 11.3%. During the same period, total assets grew at an average 10.4% a year during the period.
We project future revenues and EPS growth at 9.0% and 11.0% a year, respectively. There could be another one or two quarters where strong results in 2020 may cause negative comparisons, but the company’s long-term prospects appear very strong.
Overall, Glacier Bancorp is one of the best-capitalized and healthiest banks in its peer group. Total deposit costs are much more stable than its peer group, and it has access to $14.6 billion in liquidity including its borrowing capacity, unpledged securities, cash on hand, and brokered deposits.
Glacier Bancorp could reach a high of $103 in five years based on the historic average high P/E of 21.9 and $4.74 in EPS. On the downside, the average low P/E of 15.3 times trailing 12-month EPS of $3.33 equate to a low price of $51. An annualized 16.1% annual return is thus achievable, including an average yield of 2.2%.
