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Stock Screen: Bank Stocks with Growing Net Loans and Shrinking Loan Loss Provisions - November 14, 2012
The Banking Industry has been riddled by a persistent, historically low interest-rate environment of late. This situation has weighed down share earnings, as these businesses tend to earn additional money on wider spreads, lower-cost core deposits, and rising investment yields. Too, repayments of high-cost debt have not mitigated all of the margin pressure.
Two important metrics for banks continue to be total net loans and the provision for loan losses. The former generally provides support to a bank’s top line, since these assets often carry higher yields than other investments. The loan loss provision is an allocation to the reserve for troublesome loans. A declining provision can signal improved credit quality, which leads to increased profitability.
The two regional banks we will be examining are East West Bancorp (EWBC) and Susquehanna Bancshares (SUSQ), since these businesses have excelled in both increasing net loan totals and reducing their provisions for loan losses. In fact, both companies have boosted loan totals more than 5%, year to year in the most recent quarter, while cutting the loan loss provision over 30% during the same span. Subscribers should note that these figures compare favorably to other banks in the industry.
East West Bancorp
East West Bancorp is a holding company for East West Bank, providing financial services to individuals and small to mid-size businesses (with an emphasis on the Chinese community). It has 135 branches spread out across most of northern California.
The bank’s connection to the Chinese-American demographic has aided results in recent months. Its communities have realized strengthening demand for commercial & trade finance loans, as well as commercial real estate and single-family home loans. This particular segment of the population has expanded rapidly, which augurs well for East West going forward. What’s more, we look for a healing economy to boost customers’ appetites for small-business lending and home loans. In addition, we look for loan revenue to steadily climb. As long as low interest-rates remain in place, many buyers may seek to take advantage of solid buying opportunities, loan refinancing, and investments into riskier asset classes.
EWBC has noticed loan demand rise considerably due to firmer economic conditions. Indeed, loan originations across a broad swath of industries, such as trade finance, manufacturing, healthcare, technology, entertainment, and media to name a few, have bolstered revenues and profits. We expect a host of factors, including healthier equity markets, better employment statistics, businesses’ willingness to expand, and federal spending initiatives, to enhance loan totals ahead.
In addition to growing loan balances, the bank has benefited greatly from a lower loan loss provision. It has been able to slash this number more than 80% over the past few years, from its all-time peak of approximately $529 million during the financial crisis of 2008 and 2009. EWBC’s stricter underwriting standards have been a boon to this metric, allowing for greater reductions. We anticipate fewer “bad loans” on East West’s balance sheet over the coming quarters, enabling the bank to lower its loan loss reserves and turn its attention to investment opportunities.
Susquehanna offers banking, investment advisory, asset management, and brokerage services in the mid-Atlantic region. Solid demand for commercial and consumer loans have driven strong year-over-year advances at Susquehanna. Moreover, earlier acquisitions, most notably Tower Bancorp and its subsidiary Graystone Tower Bank, have helped bolster loans, as well. Much like its industry peers, this company stands to benefit from its clients’ increased demand for personal loans and small-business loans, which ought to continue to perk up in accordance with the broader economy. Furthermore, a pick-up in sales of big-ticket items, such as automobiles and home furnishings, has allowed Susquehanna to boost loans.
Nevertheless, results would not fare nearly as well without a dwindling loan loss provision. Credit metrics for this bank continue to move in the right direction. Indeed, both net charge offs and nonperforming assets declined during the September interim. The former fell to its lowest level since 2009, as the latter benefited from a smaller number of foreclosed real estate assets. These events have pushed SUSQ to drastically lower its provision for loan losses in recent months, in turn, lifting share earnings.
All told, we like these two stocks based on their strong performances in growing net loans and lowering loan loss provisions. They should continue to take advantage of improved loan demand, enhanced credit quality, and a healthier consumer base over future quarters.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.