Low Interest Rates Create Uncertain Climate for Banking Stocks
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The banking sector has been the source of much speculation, particularly since the financial crisis five years ago. But many of the smaller banks are often overlooked due to the flashy headlines the big players attract. Below are a few of the less talked about banks that you should consider keeping an eye on; but not all of them are buys right now due to interest rate uncertainty.
Low long-term rates is a pressing issue
New York Community Bancorp (NYSE: NYCB) will continue to suffer from long-term mortgage rates because of its heavy exposure to mortgage lending. These are relatively out of the company's control, and will continue to be a burden on the firm in the years ahead. The low interest rates are a struggle for many banking companies, but it is a particular struggle for New York Community Bancorp due to its heavy exposure to the segment.
Furthermore, the company has a high cost of borrowing due to its reliance on wholesale funding, which will continue to weaken the balance sheet. The loan-to-deposit ratio is about 125%. The company is taking out such massive loans so that it can keep its market share in multifamily lending. But making loans in excess of deposit funding could result in loan repayments eating up too much revenue.
Analysts agree, and they see the company's EPS decreasing over the next two years. This year, EPS is pegged to drop 7%, and another 2% next year. Revenue is expected to decrease 1% this year and increase 0.8% next year.
Hudson has sturdy footing
Hudson City Bancorp (NASDAQ: HCBK) is well-positioned to sustain a crippling blow in the housing sector in light of another crash. While this year has so far proven that the housing market is on the rise, Hudson City is much more secure than other banks in case of a plunge. This is because the firm deals mainly with super mortgages, that carry a loan/value ratio of 60% much of the time. This protects the company in case of falling home prices.
Additionally, the bank mainly deals with borrowers who have a ton of capital. That means there won't likely be costly foreclosures damaging the bank's returns. This large safety net allows the company to charge a lower interest rate, which attracts additional clients.
But analysts aren't quite as optimistic. They see revenue falling by 24.9% this year and 11.4% next year. This could be due to the development of government agencies that are competing for wealthy mortgage clients. The next two years will reveal whether Hudson is able to compete. If it is, I expect big things from this company.
This company looks to capitalize
Capital One Financial (NYSE: COF) sees the type of profits that are likely ahead in the airlines sector. That's why its move to team up with Delta Air Lines will result in major subscribers to the company's credit card as airline travel increases in the years ahead. Boeing estimates airline traffic will double in the next two decades. That means huge profits for Capital One, with new subscribers that want to take advantage of the air travel perks.
Furthermore, the company will realize the benefits this year of its 2012 purchase of HSBC's $30 billion credit card portfolio. With brand recognition being such an important factor in attaining customers, the purchase is sure to ramp up the number of users. Also, with the improvement in jobs data, credit card use will likely increase, and that means major profits for Capital One.
However, while analysts predict a rise in EPS by 11% this year, they anticipate a drop by 0.5% next year. This could be due to lower long-term interest rates than in previous years.
Interest rates may be too low
The banking climate is about as uncertain as the economy, and with a ton of optimism pushing these stocks up, they could be out of range for the time being. However, as an investor who anticipates continued economic recovery, I believe current prices justify real value. But before buying just any banking stock, I would wait for a rise in interest rates.
Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.
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