Rising Rates Should Power This Regional Bank Even Higher

Most investors breathed a sigh of relief last week when the Federal Reserve again elected to not to raise interest rates.

But those who hold shares of regional banks likely sighed out of disappointment, as these investors have been waiting anxiously for rates to rise. 

Many regional banks have struggled to grow profits during the long stretch of low interest rates. Profit margins — the difference between borrowing costs and lending rates — have slumped to a mere 3.17%, far below the 3.75% peak achieved in 2010.

But with a rate hike in December looking increasingly likely, a positive catalyst for the sector could be just around the corner. 

You see, most borrowing is at lower short-term rates while lending is at higher long-term rates. Regional banks benefit from the difference between the two, and that spread typically widens when the Fed begins a rate hike cycle.

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Despite the challenges of an extended low-rate environment, some regional banks have thrived. One such bank is Renasant (NASDAQ: RNST), which has dramatically outperformed its sector this year and should continue to lead the charge as rates move higher.

Founded in Tupelo, Miss., in 1904, Renasant operates 170 offices in Mississippi, Tennessee, Alabama, Georgia and Florida and has $7.8 billion in assets.

Renasant offers a complete range of banking and financial services to individuals and small- to medium-sized businesses. Its banking division earns interest income from commercial agricultural and real estate loans, which are in part funded by its checking and savings account depositors. The insurance segment sells personal and commercial insurance, while the wealth management unit administers trust accounts and sells products such as annuities and mutual funds.

Renasant has been firing on all cylinders, achieving rapid growth through a spate of acquisitions. In September 2013, the bank acquired Mississippi-based First M&F, adding 35 more branches and eight additional insurance outlets to the bank’s portfolio.

The December 2014 acquisition of the Heritage Financial Group expanded Renasant’s presence in Georgia, adding 48 offices and growing its asset base by close to a third.

And just this month, Renasant negotiated a definitive merger agreement with KeyWorth Bank, a commercial bank with six branches in the Atlanta area. The agreement, worth just under $60 million, should be immediately accretive to earnings and is planned to close in the first quarter of 2016.

Even before the recent acquisitions, RNST boasted strong financial performance. Legacy loans increased 13% in 2014 to $3.27 billion, and net interest income rose 29% to $202.6 million. Diluted earnings per share (EPS) jumped 54% to $1.88 in 2014. 

This growth is expected to continue. Analysts expect revenues to increase 25% in 2015 to $355.2 million and another 24% in 2016 to $441.1 million. While earnings are forecast to increase just 1% this year to $1.91 per share after merger expenses, they are estimated to jump nearly 25% next year to $2.38, as the impact of recent acquisitions kicks in.

Turning to the chart, RNST looks poised to move higher. 

RNST

RNST made an important low in September 2011 just under $12. The stock then advanced steadily for a little over two years, suffering only a few short pullbacks. Shares peaked in late December 2013 at just over $32. 

A more substantial pullback in early 2014 saw shares bottom in the $26 range in May of that year. RNST then traded sideways for the balance of the year, tracing out a prolonged rectangle formation with support at $26 and resistance just above $30. 

In late January of this year, RNST had a final test of $26 support. Shares held and then advanced to just over $30 by April. Another shallow pullback took them down to the $29 range by May, but the selling pressure relented and they were able to break out of December 2013 resistance at $32 and make it over $33 by July. 

After another shallow pullback, RNST again rallied, peaking at $35.33 on Oct. 21.

On the chart, there is a zone of support formed by previous resistance and marked by the parallel lines between $30 and $32. The current uptrend line drawn from the Jan. 26 low also intersects just above $30, so this level should be a solid one for setting a stop-loss. 

My target is $40.95 — just below the high analyst target of $41 and 18% above recent prices.

Additionally, Renasant has doled out a dividend of $0.68 per share every year for nearly a decade, which gives it an attractive yield of just shy of 2%. With a payout ratio of just 35%, that leaves plenty of room for a potential dividend hike.

Recommended Trade Setup:

— Buy RNST at the market price 
— Set stop-loss at $31.95 
— Set price target of $40.95 for a potential 18% gain by the end of Q2 2016

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