By Paul R. La Monica
Bankers are giddy about the prospect of fewer regulations and more merger activity in a second Trump presidency. The CEO of the nation's largest bank has said so himself. JPMorgan Chase's Jamie Dimon told attendees at a CEO conference in Lima, Peru, that bankers are "dancing in the street" because of the election outcome.
Investors in bank stocks are thrilled as well. Sure, the broader market has rallied since the election. But banks, and smaller regional banks in particular, have fared even better.
The First Trust Nasdaq ABA Community Bank Index Fund and SPDR S&P Regional Banking ETF are each up about 13% since Nov. 5. The Financial Select Sector SPDR ETF, which holds megabank stocks and other financial services companies like Visa, has gained more than 7.5% during the same time frame while the S&P 500 is up 2.6%.
Fund managers at American Century Investments say the rally has just begun. Over the past few years, regional banks had to deal with the economic slowdown during Covid, pressure in the commercial real estate/office market, and deposit outflows following the failures of high profile lenders such as Silicon Valley Bank and First Republic Bank.
Those problems are now in the rearview mirror, says Mike Rode, a senior portfolio manager at American Century. "Banks were like Kryptonite to institutional investors," Rode told Barron's. "The average small-cap value manager has been underweight banks."
Rode thinks worries about regional banks are overdone. He doesn't see the downturn in commercial real estate hitting small banks hard, largely because they lend to small businesses, not the large downtown offices that still face occupancy problems and falling asset values.
Small-cap banks are also relatively cheap: The SPDR S&P Regional Banking ETF trades for 13 times 2025 earnings while the Financial Select Sector SPDR ETF sports a forward P/E ratio of 17. Regional banks also have attractive dividend yields, averaging 2.7%.
M&A could pick up, says Jeff John, who runs the American Century Small Cap Value and American Century Small Cap Dividend funds. "We see more M&A ahead. The super regionals could reach down to buy smaller banks," John said. "The regulatory environment has been so darn difficult and people got put in the penalty box for doing deals. But that is slowly changing."
One bank in his portfolios is UMB Financial of Kansas City. The bank is in the process of buying Denver-based Heartland Financial and trades for just 13 times 2025 earnings estimates.
Rode and John also like Arkansas lender Home Bancshares, which trades at a forward P/E of 14, and California's Pacific Premier Bancorp. The latter trade at nearly 21 times 2025 earnings, a steep multiple for a small bank, but John said it's warranted by the bank's conservative lending practices and attractive loan growth.
Two of their other picks are Popular and First BanCorp, both with a major presence in Puerto Rico. The market is attractive because so few banks compete on the island, they point out, and the stocks are cheap: Popular trades for less than 10 times 2025 earnings and First Bancorp goes for about 12 times estimated profits.
Regional banks have already enjoyed a surge in the wake of the election, but investors might want to listen to Dimon and get out their dancing shoes.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 15, 2024 13:04 ET (18:04 GMT)
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