Rising interest rates have taken a toll on New England's community bank stock prices.
But H.C. Wainwright bank analyst Jeffrey Cohn predicts that community banks' consistent earnings and the continued wave of consolidation, will drive an eventual rebound in the market.
Mr. Cohn said market pressures have kept the stocks in limbo, hovering at a 10% to 15% range of their current value. Here is what he said in an interview.
Q: What's been happening with community bank stock prices in the Northeast?
COHN: Right now. they've been trading down over the last four weeks or so, as part of a general correction in bank stock prices reflecting fears about continued rises in interest rates. My expectation is that we will probably see a trading rebound from these levels, though until we are able to see some meaningful earnings progress, we probably won't go through the highs that we've already seen.
Q: Who are the stocks to watch?
COHN: I would look at someone like Long Island Bancorp., which has significant share in a market that I could only describe as fragmented, and whose management has designed a plan that, is not dependent on doing acquisitions. Rather it is dependent on increasing productivity of the existing franchise, with regard to producing more revenues and doing so at lower cost. The current market price way understates the value of that franchise.
I look at someone like a Farmers and Mechanics in Connecticut, which is the seeondlargest banking institution in its county. It is a company that is on the comeback trail after losing money for several years. As they make major strides in repairing the credit quality, I expect them to tap into their net operating losses, which are better than-$5 per share and currently off the balance sheet. And the stock today is trading well below the stated book Value. which doesn't include any of that off-balance sheet item. And it is also a management that has devised several programs for 0oosting the revenues for the company even as they're still working out of their problem assets.
Q: Are there any others?
COHN: Another one that I have liked has been Banknorth. which operates the largest banking organization in Vermont. It's not a state where buyers or acquirers are flocking to, but they too have a tremendous opportunity to make that organization more efficient and to leverage some of their market power. And they too have been benefiting from a rather protracted recovery of asset quality.
Q: Where do you see the prices going?
COHN: There are a couple of things that seem to influence bank stock prices. The negatives include rising interest rates. the prospect of inverted yield curves and the presence of high inflation, because high inflation erodes the value of financial assets. There is the concern that as short-term rates rise relative to long-term rates we get a flat or even inverted yield curve.
I see the uncertainty that comes from a rising interest rate environment limiting the upside for-bank stocks as far as price earnings/multiple expansion. We basically had multiple compression over the last month or so. So what I see are periods where the stocks may rise 10 or 15% and go down 10 or 15%. So that we're not looking at sky's-the-limit type of pricing.
There may be events like takeovers in specific geographic areas that cause stocks in that area to rise and make people interested in the consolidation effect. [But] it'll take a long time before the consciousness shifts to not worrying about interest rates.
Q:: How long to you see this stage lasting?
COHN: I can't tell you how long interest rates will continue to rise or how long tae concern will be. And just bee.ruse we're worried about interest rates now doen't mean they'll rise tomorrow. We may have to wait two months or three. But just the fact that the concern is there acts as a depressant.
Q: What do lyou see happening next?
COHN: There are a lot of positive trends here and I think the combination of these positive trents will have a favorable impact on these stock prices. But that's the upward end of the range. The knowledge that these favorable trends exist should help put in place the next rebound in the stock prices.