The U.S. banking industry’s outlook looks stable after last year's challenges. Greater certainty around interest rates, manageable asset quality pressures, and expected regulatory improvements provide optimism for the industry.
Therefore, investors could consider buying fundamentally strong bank stocks: Capital Bancorp, Inc. (CBNK), FS Bancorp, Inc. (FSBW), and Old Point Financial Corporation (OPOF).
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s going on in the banking industry.
Since last year, regional banks faced challenges such as deposit outflows, higher deposit costs, credit rating downgrades, funding cost pressures. However, the U.S. banking industry has rebounded strongly following last year’s bank failures, demonstrating increased stability, a positive performance outlook, and capital growth potential.
The banking industry still faces risks of default on commercial real estate (CRE) loans, economic uncertainty, higher funding costs, and stringent lending standards, but banks are expected to maintain good profitability, with a return on common equity of 10% - 11%.
Although banks’ net interest income (NII) will likely decline this year, they will likely build capital through earnings retention as they prepare for stricter norms. Moreover, banks are expected to manage asset quality challenges with sufficient pre-provisioning to absorb expected credit losses.
According to Fitch Ratings, potential fee income improvement, eventual stabilization in asset quality, and contained expense growth will support the financial performance of banks toward the latter part of 2024.
Furthermore, the Federal Reserve's expected rate cuts this year will benefit banks. Lower interest rates can stimulate borrowing and investment, increase demand for loans, and positively impact banks' interest income. Moreover, lower interest rates will decrease banks' cost of borrowing to fund loans and other transactions.
Considering these conducive trends, let’s analyze the fundamental aspects of the three bank stocks.
Capital Bancorp, Inc. (CBNK)
CBNK operates as the bank holding company for Capital Bank, N.A., and provides various banking products and services to businesses, not-for-profit associations, and entrepreneurs in Maryland, Virginia, and the District of Columbia. It operates through the Commercial Banking, Capital Bank Home Loans, and OpenSky segments.
In terms of the trailing-12-month Return on Common Equity, CBNK’s 14.98% is 37.1% higher than the 10.93% industry average. Its 1.61% trailing-12-month Return on Total Assets is 46.6% higher than the 1.10% industry average.
CBNK’s net interest income for the fourth quarter ended December 31, 2023, came in at $34.89 billion. The company’s adjusted net income rose marginally year-over-year to $9.03 million. Its EPS rose 4.8% over the prior-year quarter to $0.65. In addition, its adjusted average total assets stood at $2.20 billion, up 3.2% from the year-ago value.
Analysts expect CBNK’s revenue for the quarter ending March 31, 2024, to increase marginally year-over-year to $40.70 million. Its EPS for the quarter ending June 30, 2024, is expected to grow 14.2% year-over-year to $0.59. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 24.5% to close the last trading session at $20.94.
CBNK’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked first out of 37 stocks in the Mid-Atlantic Regional Banks industry. It has a B grade for Value, Momentum, Stability, and Sentiment. To access CBNK’s grades for Growth and Quality, click here.
FS Bancorp, Inc. (FSBW)
FSBW operates as a bank holding company for the 1st Security Bank of Washington that provides banking and financial services to local families, local and regional businesses, and industry niches. The company operates in two segments: Commercial and Consumer Banking and Home Lending.
In terms of the trailing-12-month net income margin, FSBW’s 25.93% is 9.3% higher than the 23.73% industry average. Its 14.30% trailing-12-month Return on Common Equity is 30.8% higher than the industry average of 10.93%. Likewise, its 1.21% trailing-12-month Return on Total Assets is 10.4% higher than the industry average of 1.10%.
For the fiscal fourth quarter that ended December 31, 2023, FSBW’s total interest and dividend income amounted to $44.44 million, up 24.1% year-over-year. Its net income and earnings per share increased 28.2% and 26.8% from the year-ago value to $9.77 million and $1.23, respectively.
In addition, the company’s non-GAAP tangible common stockholder’s equity grew 7.8% year-over-year to $243.55 million. Also, as of December 31, 2023, its total assets stood at $2.97 billion, compared to $2.63 billion as of December 31, 22.
Street expects FSBW’s revenue for the quarter ending September 30, 2024, to increase 1.6% year-over-year to $36.20 million. Its EPS for the fiscal 2025 is expected to increase 9.7% year-over-year to $4.63. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 14.4% to close the last trading session at $33.80.
It’s no surprise that FSBW has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Value and Sentiment. Within the Pacific Regional Banks industry, it is ranked first out of 42 stocks. In total, we rate FSBW on eight different levels. Beyond what we have stated above, we also have given FSBW grades for Growth, Momentum, Stability, and Quality. Get all the FSBW ratings here.
Old Point Financial Corporation (OPOF)
OPOF operates as the bank holding company for The Old Point National Bank of Phoebus, which provides consumer, mortgage, and business banking services to individual and commercial customers in Virginia. The company offers deposit products, including interest-bearing transaction accounts, money market deposit accounts, savings accounts, time deposits, and demand deposits.
On January 31, 2024, OPOF announced a strategic alliance with Tidewater Home Funding, transitioning mortgage loan processing while maintaining its branding as Old Point Mortgage and expanding mortgage product offerings.
Joseph Witt, President of Financial Services and Chief Strategy Officer at OPOF said, “This strategic alliance between Old Point and Tidewater Home Funding will expand opportunities for both organizations, continue to provide our customers with excellent service and local decision-making, and maximize value to our shareholders.”
In terms of the trailing-12-month Capex / Sales margin, OPOF’s 2.13% is 4.5% higher than the 2.04% industry average.
OPOF’s net interest and dividend income for the fourth quarter that ended December 31, 2023, increased 27% year-over-year to $17.94 million. The company’s non-GAAP tangible stockholder’s equity grew 8.4% year-over-year to $104.94 million. Its adjusted income stood at $1.48 million and $0.29 per share, respectively.
Over the past nine months, the stock has gained 2.2% to close the last trading session at $16.20.
OPOF’s strong fundamentals are reflected in its POWR Ratings. It has a B grade for Growth, Stability, and Sentiment.
It is ranked #2 in the Mid-Atlantic Regional Banks industry. To see OPOF’s Value, Momentum, and Quality ratings, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
CBNK shares were trading at $20.94 per share on Friday afternoon, up $0.50 (+2.45%). Year-to-date, CBNK has declined -13.13%, versus a 10.06% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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