Banks Need Loan Growth to Keep Rallying. These Stocks Already Have It.

Loan growth has been hard to come by for the banks, but it could be the catalyst for their next move higher.

Banks have been one of the hottest sectors in 2021, with the SPDR S&P Bank exchange-traded fund (ticker: KBE) climbing 31.7% year to date. That gain, 20 percentage points more than the S&P 500 index, has been driven by a reopening economy, robust capital markets, and higher bond yields, among other factors. The banks, however, have been stuck since March, as they wait for something to catch investor attention again.

That something is loan growth, the bread-and-butter of banking. Lending has been surprisingly tepid despite the recovery. Many households and businesses are flush with savings and stimulus, which will take some time to be spent. But it will. For now, investors should consider banks like Pinnacle Financial Partners (PNFP), Allegiance Bancshares (ABTX), and PNC Financial Services Group (PNC), which operate in regions where growth is booming.

No doubt, the U.S. has been awash in cash. S&P 500 companies—excluding financials—had nearly $2 trillion on their balance sheets at the end of 2020, according to data from S&P Dow Jones Indices, 25% over the prior year. As a result, bank loan balances dropped 1.2% during the first quarter of 2021, compared with the previous 12 months, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile. In the three years before the pandemic, loan balances typically grew about 4% annually.

Some see lackluster loan growth as the new normal in U.S. banking. Baird analyst David George argues that any pickup in loan growth will be muted, creating a tough environment for banks looking to build loan books. “We continue to expect core loan growth will be soft near term as corporations utilize large cash buffers to fund working capital and capex needs before borrowing from banks,” he writes.

The Next Leg

Higher loan growth could help boost these banks’ shares.

P/TBV=Price to tangible book value; E=estimate

Sources: FactSet; company reports

Others are more upbeat. Truist Securities analyst Jennifer Demba sees loan pipelines building in the second half of 2021 as the economy revives and stimulus wears off. “We’re going to need to see confidence in the sustainability in [economic] normalcy,” she says.

Even bank CEOs are citing normalcy as they ponder what will get loans growing again. “[There’s] hesitancy waiting for more certainty on the pandemic,” PNC’s CEO William Demchak said in an analyst call in April. “But when that happens, and it will happen, it almost mechanically has to happen, you’re going to see pretty appreciable loan growth.”

Normalcy is coming sooner to some parts of the U.S. than others. Over the past year, the Southeast and Texas saw an influx of newcomers as the pandemic made less densely populated areas more attractive.

Houston’s Allegiance Bancshares is a good example. Keefe, Bruyette & Woods analyst Brady Gailey notes that management was feeling optimistic about loan growth, given the migration into Texas. The bank expects low-single digit loan growth this year, before hitting midsingle digits in 2022. It has been helped by 4,000 new clients from the Paycheck Protection Program over the past year, amounting to over $1 billion in loans; roughly a quarter of its PPP clients do other business with Allegiance. It also gained 1,800 non-PPP clients. The stock recently closed at $40.56.

Nashville-based Pinnacle Financial should benefit from a return of tourism and other business to the city, and the bank is feeling more confident about loan growth. “There’s a vibrance in these markets, which gives us an advantage in terms of loan demand,” says Pinnacle CEO Terry Turner.

Pinnacle expects to see loan growth in the high-single digits this year—helped by the return of in-person meetings. Its loan book grew by $2.7 billion, or 13.2%, over the first quarter of 2020, thanks in large part to PPP loans. Excluding those loans, the bank said quarter-over-quarter loan growth ran at an annualized rate of 7.2%. Demba has a Buy rating and $100 price target on the stock, up 11% from a recent $90.

Pittsburgh-based PNC has a geographic footprint that spans the East Coast. PNC benefits from a well-heeled Northeast base—some of whom have headed south but remain clients.

PNC has noted that clients have begun to tap credit lines, a good indicator for loan growth. The bank’s loan balances fell 2% in the first quarter compared with the previous one, and management expects to see a pickup in loan growth in the second half as companies rebuild inventories. With its big footprint, PNC is well positioned to compete with the larger banks, notes Evercore ISI analyst John Pancari, who recently initiated coverage with an Outperform rating and a $215 price target, up 11% from a recent $194.

And sometimes, all a bank needs is well-heeled clients that need to borrow. Santa Clara, Calif.’s SVB Financial Group (SIVB)—formerly Silicon Valley Bancshares—is a big tech lender that has benefited from the growth company boom. SVB saw a 6% quarter-over-quarter jump in loans due in large part to private equity fund raising and investment. It expects loan growth in 2021 to be in the mid-30%s. Demba, who views SVB as an “idiosyncratic” pick, given its geography, has a Buy rating on the stock despite its 167% gain over the past 12 months. She has a $625 target on SVB’s shares, up 6% from Friday afternoon’s $588.

Carleton English

source:barrons.com