By: Bram Berkowitz – Jan 7, 2022 at 6:30AM
Banks are expected to outperform this year with interest rates likely to tick up.
Bank stocks are expected to outperform in 2022, largely because the Federal Reserve is projected to raise interest rates this year, which benefits most banks. The economy is also expected to continue to normalize, and banks will hopefully see loan growth tick up.
All of this should help restore banks’ net interest margin, which essentially shows the difference between what a bank makes on interest-earning assets like loans and securities, and pays out on interest-bearing liabilities like deposits. Three bank stocks that I would recommend buying this year are Customers Bancorp (CUBI 1.44%), Triumph Bancorp (TFIN -1.04%), and SVB Financial Group (SIVB 0.53%), the parent of Silicon Valley Bank. Here’s why.
1. Customers Bancorp
Customers Bancorp stock had a terrific year in 2021, rising more than 200%, but I think there could be a lot more to come in 2022. The bank has very good technology and really excels in two major areas.
The first is lending through the U.S. Small Business Administration (SBA) loan program. The bank has built a platform that enables SBA borrowers to close on loans in as little as 30 days, which is quick for the complex SBA loan process. Customers Bancorp showed the power of its platform in the Paycheck Protection Program (PPP), which is based on the SBA lending program, by doing roughly $10 billion of PPP loan volume, which is an absurd amount for a bank of its size.
In 2021, the bank also built a real-time payments platform that can help better facilitate crypto trading because parties on the network can complete transactions instantly 24 hours a day, 365 days a year. The platform is in its very early days but has already brought in $1.5 billion of deposits that it pays no interest on, from businesses that want to join the network.
Based on everything the bank has going for it right now, its valuation looks light, trading at around nine times earnings and 190% tangible book value (TBV), which is what a bank would be worth if it were liquidated. The 190% valuation is strong for the bank sector, but light if the bank continues to execute on its current crypto and small-business banking strategy.
2. Triumph Bancorp
Triumph Bancorp is unique in the sector, largely serving the freight industry and more specifically the trucking sector. It does this with its payments platform TriumphPay, which helps the key players in the trucking industry — carriers, shippers, freight brokers, and factoring companies — better create and process invoices, as well as get payments earlier.
A carrier could use this platform not only to submit invoices easier but also to get paid quicker by connecting with a factoring company, which would purchase a trucker’s invoice right away but at a discount. Otherwise, the trucking company would have to wait to get paid, which is standard in the industry but problematic because truckers incur expenses up front to transport items. The factoring company makes a profit when it collects on the invoice later. Triumph has invested a lot of time and money to build out TriumphPay. While the bank is still investing in the platform, it is now ready to really go on offense with it.
After processing about $4.2 billion of volume on TriumphPay in the third quarter, that equates to an annual run rate of close to $17 billion. After the first three quarters of 2021, the bank generated roughly $40 million of non-interest income, but only $12 million appears to have come from TriumphPay. CEO Aaron Graft said on the company’s recent earnings call that he thinks TriumphPay will be processing $75 billion of payments volume annually in three years, resulting in $100 million of fee income. Furthermore, he sees TriumphPay as a $500 million business long term.
Trading at more than 630% TBV, the bank might have the highest valuation in the entire sector. But investors see this bank as more of a fintech or payments processor, which means it’s going to trade at way higher multiples than almost any bank out there right now. If Triumph can make good on Graft’s promises, I’m sure the stock can go higher.
3. Silicon Valley Bank
A juggernaut in the industry for many years now, Silicon Valley Bank caters to the start-up and tech banking sector and has built a full product suite for these customers. It banks a lot of start-ups early, and in return for taking on the risk, usually gets sweeteners like equity warrants that the bank can cash when the start-ups go public or are acquired.
Silicon Valley also makes loans to private equity (PE) and venture capital (VC) companies and has a full suite of products to serve executives with high net worth, whether from VC/PE companies or successful start-ups. Over the last year, Silicon Valley has been bulking up its product suite, notably on the private banking and wealth management side, with its purchase of Boston Private, as well as with its booming investment bank, where it has more than doubled the number of bankers in the unit over the last year.
In its latest quarterly letter, the bank said that in a low-rate environment, it thinks it can continue to generate a 15% return on equity and 10% annual earnings-per-share (EPS) growth. In a sustained rising-rate environment, the bank said, it can produce annualized EPS growth of 20%. I expect Silicon Valley Bank to continue to outpace the industry.
