Late on May 22, the House of Representatives voted to pass a bill loosening Obama-era regulations on the banking industry. The Economic Growth, Regulatory Relief and Consumer Protection Act not only eases rules for banks, it sets the stage for further deregulation by multiple agencies. President Trump is widely expected to sign the bill into law before Memorial Day. 

According to House Speaker Paul Ryan, the new bill is likely to significantly benefit community banks. However, apart from suburban and rural banks, the bill is also expected to benefit regional and medium-sized institutions. With additional rate hikes also around the corner, investing in select bank stocks looks like a smart option.   

House Approves Bill Easing Bank Rules

On Tuesday, the House voted 258 to 159 to approve the bipartisan Senate-drafted legislation which significantly deregulates the banking industry. The bill raised the assets threshold for banks which are considered too important to fail from $50 billion to $250 billion. In doing so, it excluded all banks except the largest from stringent regulatory supervision.

As a result, the likes of SunTrust Banks, Inc. (STI - Free Report) and BB&T Corporation (BBT - Free Report) will no longer have to submit themselves to periodic stress tests or submit plans known as living wills. These plans outline how a bank proposes to be wound up in case it faces bankruptcy.

The bill also cuts down mortgage loan data reporting requirements for most banks. New measures have been introduced for those taking student loans. Additionally, credit reporting agencies will now be required to offer credit monitoring services at no charge. 

Further Deregulation on the Anvil

The new legislation also gives regulators greater discretion to decide at what point banks holding $100 billion to $250 billion in assets would have to undergo stress tests for capital adequacy. Such a need would, of course, only arise in case another financial crisis takes place.

This doesn’t exclude the largest banks from stress tests altogether. But, increasing the threshold from $50 billion to $250 billion could provide the Federal Reserve with the “political cover” to further ease regulations governing such stress tests. These tests are collectively termed Comprehensive Capital Analysis and Review or CCAR.

Further, multiple agencies, including the SEC and the Fed, have powers to amend the manner in which the Volcker Rule is implemented. Congressional approval would not be required in such an event. For instance, regulators plan to remove an assumption that defines positions held by banks for a period led than 60 days as speculative. 

Our Choices

In keeping with Trump’s electoral promises, the new bill passed by the House has greatly eased banking regulations. Further, it has set the stage for further deregulation which will likely be undertaken by multiple financial agencies.

Investing in banking stocks looks like a smart option at this point. This is particularly true since rates are likely to trend higher. However, picking winning stocks may be difficult.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

First Financial Northwest, Inc. (FFNW - Free Report) is the holding company of First Financial Northwest Bank. The bank offers commercial banking services in Washington.

First Financial Northwest has a VGM Score of B. The company has expected earnings growth of 46.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 15.6% over the last 30 days. The stock has a Zacks Rank #1 (Strong Buy). 

First Mid-Illinois Bancshares, Inc. (FMBH - Free Report) offers community banking services and products through its subsidiaries.

First Mid-Illinois Bancshares has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 18.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.1% over the last 30 days.

Summit Financial Group, Inc. (SMMF - Free Report) is the holding company for Summit Community Bank, Inc. The bank offers community banking and other financial services primarily in Virginia and West Virginia.

Summit Financial has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 19.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.7% over the last 30 days.

BancorpSouth, Inc. (BXS - Free Report) operates as a financial holding company for BancorpSouth Bank. The bank offers commercial banking and financial services to individuals and small-to-medium businesses.

Zebra Technologies has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 32.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.4% over the last 30 days.

SVB Financial Group (SIVB - Free Report) is a diversified financial services company which provides a wide range of banking and financial products and services.

SVB Financial has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 60.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 13.9% over the last 30 days.