Regional and community banks have been on fire in recent weeks and there is a good chance they will continue to lead the market during the rest of 2013.
The credit problems that have kept a cap on earnings are behind us now, so banks no longer need to set aside huge amounts of money to offset problem loans.
Plus, as the economy continues to slowly grind towards a recovery, we should see loan demand pick up for these more traditional banks.
To top it off, most of these smaller banks are going to benefit from higher interest rates. Rising long-term rates are likely to increase the critical net interest margin that is the source of bank profits. And many people overlooked Chairman Ben Bernanke’s statement that short-term interest rates will remain low for some time … but low short-term rates while longer term rates bump a bit is a bonus for regional banks.
It is critical to select only the very best banks when adding regional banks to your portfolio, though. There is a wide discrepancy between banks as far as loan demand, regional economic activity and loan quality. Although the sector may power higher for the year, the banks with the best fundamentals will outperform those with weaker financials.
Right now we are still fairly early in what should be a strong profit cycle for the smaller banks. In the past two weeks, we have seen several banks report favorable conditions that allowed them to be upgraded by Portfolio Grader.
Chemical Financial Corp. (CHFC) is a Michigan-based bank that has 156 offices on the Michigan Peninsula. The bank is growing its asset base and earnings at a decent clip even as loan losses are shrinking. The steady improvements in Chemicals fundamental condition lead to the stock being upgraded to a “B” this week. The bank is a “strong buy” and could be upgraded again as fundamentals continue to improve.
Conditions at Suffolk Bancorp (SUBK) have also improved the point it was upgraded to a “B” rating by Portfolio Grader. The bank has 30 branches in Suffolk County New York and reported a very strong first quarter with earnings up 90% on a year-over-year basis. Credit quality has improved dramatically in the past year and the company is seeing increased loan demand especially commercial lending. Suffolk Bancorp is now rated a “buy” according to Portfolio Grader.
All in all, we are only in the first few innings of the bank improvement cycle. It is important to keep an eye on these stocks to see which ones are upgraded by Portfolio Grader and to make sure you own the best stocks in a sector that should heat up in the second half of the year.
Louis Navellier is the editor of Blue Chip Growth.