Friday, February 23, 2024
Stock Market

Bank Stocks Are Back in Business: 3 Picks for Rate Cuts

After 11 interest rate hikes that started with a 0.25% increase in March 2022 and ended with a 0.25% increase in July 2023, the Federal Reserve has left rates unchanged for three consecutive meetings. That’s good news for bank stocks

The Fed said in December that it would likely cut rates three times in 2024, dropping the target range by 75 basis points to 4.50% and 4.75%. Followed by four cuts in 2025 and three more in 2026, it could bring the target range to 2.0%-2.25%. That would be even better for bank stocks. 

It’s not guaranteed that there will be 10 interest rate cuts over the next three years. However, if it does happen, small-cap stocks could be the big winners, which makes small-bank stocks the focus of my article. 

In November, Barron’s published an article highlighting four bank stocks that should gain from future rate cuts. The screening criteria for these stocks were 1) a market capitalization of $1.5 billion or less, 2) dividend yields above 4.5%, 3) tangible common equity ratios above 8%, and 4) dividend payout ratios less than 65%. 

I’ll increase the market cap to $10 billion or less for my screen, with a dividend yield of 2.5% or higher. The other two remain the same. 

New York Community Bancorp (NYCB)

New York Community Bancorp (NYSE:NYCB) is the bank holding company for Flagstar Bank, which it acquired for $2.0 billion in December 2022. It has a market cap of $7.45 billion and yields a high 6.6%. 

Based in Hicksville, New York, the bank has 436 branches across nine states, including New York, Florida, Arizona and Michigan. It is the largest multi-family portfolio lender in the New York City area and the second-largest in the country.  

It had $111.2 billion in total assets, $84.0 billion in loans, and $82.7 in deposits as of Sept. 30, 2023. Its net income in Q3 2023 was $266 million, 81% higher than a year earlier. 

The holding company’s net interest margin (NIM) in the third quarter was 3.27%, six basis points higher than Q2 2023, and the second quarter had an NIM above 3.0%. Its interest-earning assets were 1.45x its interest-bearing liabilities.

Of the 19 analysts that cover its stock, 12 rate it Overweight or Buy, with a target price of $13.00, 26.2% higher than its current share price.  

Valley National Bancorp (VLY)

Valley National Bancorp (NYSE:VLY) is the bank holding company for Valley National Bank. It has a market cap of $5.48 billion and yields 4.1%.

Based in Wayne, New Jersey, Valley National Bank dates back to 1927. It has $61.4 billion in assets, $50.1 billion in loans, and $49.9 billion in deposits as of Sept. 30, 2023. Its net income in Q3 2023 was $132.2 million, 26% lower than a year earlier.  

As CEO Ira Robbins stated in its Q3 2023 conference call, Valley spent the past few years converting its core operating systems into one single system that will enable its bankers to leverage technology to grow its business. 

The holding company’s net interest margin (NIM) in the third quarter was 2.91%, three basis points lower than Q2 2023. Its net interest income in Q3 was $412.4 million, lower than in Q2 2023 and Q3 2022. Its interest-earning assets were 1.39x its interest-bearing liabilities.

Of the 12 analysts that cover its stock, six rate it Buy, with a target price of $12.00, 11.9% higher than its current share price. It has a price-to-sales ratio of 2.78, less than its five-year average of 3.20. 

As the CEO said in the conference call, the decline in its net interest income in recent quarters appears to be ending. That’s good news for VLY stock.

Preferred Bank (PFBC)

Preferred Bank (NASDAQ:PFBC) is a Los Angeles-based commercial bank with a history of working with the Chinese American community in Southern California. Founded in 1991, the bank participates in the mainstream markets in the Los Angeles area today. These include lending services to middle-market businesses with annual sales of $3 million to $50 million and loans of up to $120 million.  

The bank is the smallest of my three selections, with a market cap of $5.48 billion. It yields 3.8%. 

Preferred Bank has $6.7 billion in assets, $5.3 billion in loans and $5.7 billion in deposits as of Dec. 31, 2023. 

It reported Q4 2023 results on Jan. 24. They included net interest income of $69.4 million, down 6.3% from $74.1 million a year earlier. Its net interest margin in the fourth quarter was 4.24%, down from 4.75% in Q4 2022. Its net interest income rose 17.0% to $289.4 million for the year, with interest-earning assets 1.29x its interest-bearing liabilities.

Of the five analysts that cover its stock, three rate it Buy, with a target price of $84.00, 13.4% higher than its current share price. 

I’d look at this one more closely. Its net interest margin above 4% is very attractive. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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