The banking sector may not seem a hot spot to invest in, given post financial crisis regulatory issues and stringent regulations plaguing the industry. However, moderate growth expectations of the U.S. economy along with a hike in interest rates seem the right cues to get onboard.
"U.S. banks have outperformed the broader U.S. equity market in 2015. Credit quality has been excellent, and investors once again are optimistic about the prospect of rising interest rates and their impact on the banking sector," says Morningstar analyst Robert Goldsborough in an analysis of SPDR S&P Bank ETF.
Stocks with strong fundamentals and good growth potential can be found in the banking industry with due diligence amid all the regulatory mess and complexity. One such stock worth your attention is Westamerica Bancorp. WABC.
With total assets of $5.00 billion as of Sep 30, 2015, Westamerica derives 73.8% of its revenues from net interest income, which will benefit from the rising rate environment.
Why an Attractive Pick?
Revenues: Though Westamerica has not witnessed historical growth in revenues due to the persistent low interest rate scenario and a decline in overall loan demand, we believe the company is presently well positioned to reverse the trend.
The company’s projected sales growth (F1/F0) of 4.83% as against the industry average growth rate of 0.05% along with a rising rate environment assures future improvement in revenues.
Asset Quality: Westamerica continues to demonstrate enhanced credit quality. The company has been recording a consistent decline in provision for loan losses and non-performing assets over the past several quarters. With an improvement in the overall economy, we expect further improvement in asset quality in the upcoming quarters.
Reduction in Expense Level: In the present economic scenario, where many companies are challenged by rising expenses, Westamerica’s decreasing operating expenses is an advantage. Over the last 5 years, expenses have declined at a CAGR of 4.3% (2010–2014). This trend continued in the first nine months of 2015 as well.
Leverage: Westamerica’s debt/equity ratio stands at 0.00 compared to the industry average of 0.57, indicating lower debt level relative to the industry. The financial stability of the company will help it perform better under volatile and unpredictable business environments.
Steady Capital Deployment: Westamerica is a worthy choice for yield-seeking investors. In the first nine months of 2015, the company returned $44 million to its shareholders in the form of share repurchases and dividends. Going forward, we believe the company will continue to return capital to its shareholders, aided by a strong balance sheet position.
Favorable Zacks Rank: Westamerica currently carries a Zacks Rank #2 (Buy), driven by stability in the Zacks Consensus Estimate over the last 30 days for 2015 and 2016.
Other Stocks to Consider
Some other western banks worth considering include BofI Holding, Inc. BOFI, Central Pacific Financial Corp. CPF and Bank of Commerce Holdings BOCH. These stocks hold the same rank as Westamerica.
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