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Indiana bank stocks surge on Trump prospects

January 14, 2017

Indiana-based banks have benefited from a post-election stock jolt hitting financial stocks across the country, as investors exude optimism about policies and the economy under the incoming Trump administration.

Most of the publicly traded banks headquartered in Indiana saw their share prices decline steeply early in 2016. Bank stocks slowly regained ground, then rallied strongly after the Nov. 8 election of Republican Donald Trump, who investors think will usher in lower corporate taxes and a more favorable regulatory environment.

Industry watchers said the higher stock prices reflect the expectation that brighter days are ahead for banks, which have been bogged down by low interest rates and heightened regulatory obligations since the Great Recession.

If sustained, observers said, the higher stock prices could heat up merger-and-acquisition activity, especially for banks looking to use their stock as currency to do deals. And banks contemplating selling might be more inclined to do so with higher valuations.

renninger-mike-mug.jpg Renninger

“Not all banks are for sale—and many banks are fervently independent,” said Mike Renninger of Carmel-based bank consulting firm Renninger & Associates LLC. “But this [stock rally] will, I believe, lead to the potential for more acquisition or consolidation discussions.”

Of the 110 banks based in Indiana, 37 are publicly traded. Those saw their share prices increase a median of 27.6 percent in 2016, according to data from bank-tracking firm SNL Financial.

The sector far outpaced the market overall, as measured by the S&P 500, which advanced 9.5 percent in 2016. And some banks racked up gains that far exceeded the median. For example, shares of Jasper-based German American Bancorp leapt 58 percent, while stock in Greensburg-based MainSource Financial Group and Michigan City-based Horizon Bancorp gained 50 percent.

The lion’s share of the gains came after the election. MainSource was up only 9 percent and Horizon 3 percent when polls closed on Election Day.

The Nasdaq Bank Index, which includes about 350 domestic banks, grew 5.4 percent in that same span but finished the year up 33.3 percent.
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“It’s been pretty much a roller-coaster year that closed on an extremely strong note,” said Joe Fenech, a Zionsville-based bank analyst with Hovde Group.

“Generalist investors have mostly shunned the banking sector for the past several years because of the regulatory burden and just the lack of excitement, to be quite honest. … So a lot of generalist investors have all of a sudden rushed after the election to boost their formerly underweight positions in bank stocks to market-weight or overweight.”

Fenech and other observers said they see a variety of factors fueling the bank stock boom.

The two biggest appear to be the outlook for the corporate income tax rate and for interest rates. Trump and Republicans in Congress have indicated they want to lower the current 35-percent tax rate, and the markets expect the Federal Reserve to raise its benchmark interest rate multiple times this year. (It has done so only twice in the past decade.)

Those interest rates determine what banks can charge for loans, so rate increases bode well for higher revenue. Higher interest rates and lower income taxes translate into bigger profits, which drive up stock prices. 

Walker Walker

“What’s happened is, banks are getting a boost on both sides of the income statement,” said Sara Walker, chief economist at Wisconsin-based Associated Bank, about the expectation of higher net interest margins and lower costs.

“So you have a double dip of a good kind,” she said.

Bank expenses could be trimmed even lower if regulatory and compliance costs subside, experts said. While it remains to be seen how much regulation-cutting legislators will accomplish, observers at the very least don’t expect new regulatory costs under Trump.

Still, it’s possible banks could give back some of their recent gains if Trump and Congress fail to deliver the business-friendly policies they’re promising. Investors also could grow impatient waiting for policy changes, which are unlikely to take effect before 2018.
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And, depending on the timing, interest-rate hikes could turn off potential borrowers, softening demand for loans. Bank stocks also could face other headwinds, including continued sluggish U.S. gross domestic product growth.

Fenech Fenech

But Fenech of Hovde Group sees additional upside. He said that, if the factors that have swelled stocks so far—anticipation of lower taxes, loosened regulations, higher interest rates and an improving economy—come to fruition, bank stocks “could see upward of a 30 percent improvement in earnings estimates for banks in 2018.” That could cause shares to jump another 15 percent to 17 percent this year, he said.

Some banks already are taking advantage of higher stock prices and pulling the trigger on deals. MainSource, for instance, on Dec. 19 announced its agreement to buy Louisville-based FCB Bancorp Inc. in a cash-and-stock deal worth $56.9 million. 

The acquisition accelerates its expansion into Louisville and swells assets from $4 billion to $4.5 billion. MainSource, whose shares trade on Nasdaq, paid a 92 percent premium above FCB’s over-the-counter closing price on the day before the deal was announced.

According to Renninger’s analysis of SNL Financial data, Indiana banks listed on Nasdaq saw their stock prices increase a median of 48.1 percent in 2016, versus an 18.6 median increase for over-the-counter stocks, which are less liquid.

Speaking about bank deals in general, Renninger said, “If you’re a Nasdaq-traded bank and you want to buy an over-the-counter bank, you could theoretically offer a pretty nice price. And it might be hard for shareholders to say no to that.”•

 

 

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