Bank stocks are presently feeling the pinch of falling yields as investors fret over the timing and scope of President Donald Trump’s policies and how the administration will balance tax cuts and infrastructure outlays with protectionist trade policies.
Meanwhile, investors should cash in on the slump and snap up some banking stocks before improved regulatory conditions and rising interest rates lift share prices. While deregulation could reduce costs, hike in rates will translate into higher profit margins. Needless to say, Trump’s jobs growth plans could drive demand for banking services.
3 Straight Days of Losses
Weakness in bank shares are weighing on the broader markets as the SPDR S&P Bank ETF (KBE) and the Regional Banking ETF (KRE) lost around 1%, marking a three-day losing streak as on Feb 8. Meanwhile, the benchmark 10-year Treasury note yield slid to a three-week low of 2.349%. The yield on the 30-year bond fell to 2.959%, also marking its lowest level since mid-January. Low yields, primarily, hurt banks’ business models.
Bank stocks moved south as the treasury yields declined since investors await details on Trump’s potential economic policy. Trump banned immigration from seven Muslim-majority countries, including legal residents and visa holders. This decision has drawn congressional criticism and led to widespread protests.
Some Republican congressmen, in the meanwhile, said an Obamacare replacement is not in the cards until 2018. However, Speaker of the House Paul Ryan later said replacement should pass this year. Trump also provided little details about his infrastructure outlays other than issuing an executive order to begin the process of building his promised US-Mexico border wall.
Keep the Long-Term Game in Mind
However, Trump did sign an executive order designed to scale back the Dodd-Frank Act. Trump views the Dodd-Frank regulatory overhaul as a harsh measure, especially, on smaller banks as they had to beef up compliance compartments to deal with a list of new rules. He believes that the Dodd-Frank Act has for a considerable period of time limited operational flexibility. Banks are hamstrung by the extreme regulatory environment over the past six or seven years. A rollback can boost some of their earnings power.
Trump’s team is also focusing on scaling back the Financial Stability Oversight Council, which serves as a watchdog on big players in the economy. They also want to fix a section of Dodd-Frank Title II that has given financial regulators the right to take over a failing financial firm and liquidate it. At the same time, the Trump administration is expected to embrace encouraging aspects of the law such as regulating derivative products and transparency of credit rating agencies.
Jobs report for the month of January, in the meanwhile, showed a pickup in hiring, bolstering the Fed’s case for a gradual approach toward hiking rates this year. Analysts at Goldman Sachs Group Inc. (GS) bet on the odds for three Fed rate hikes this year and said that their “cumulative probability of at least one hike by June remains a solid 80%”. The Fed had already raised its key interest rate to a range of 0.25% to 0.50% for the first time in nearly a decade in December. Higher longer-term interest rates can boost bank profits, as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
Five Smart Ways to Play It
Bank stocks across the board are now losing ground, however, lighter regulations and rising interest rates under Trump’s presidency will surely drive them to new highs. A smart investor should bet on fundamentally solid and well-positioned banks to make the most when the broader financial sector gains traction. Also, by purchasing stocks right after a dip, investors are essentially buying shares at a discounted price.
We have selected five such stocks that carry a Zacks Rank #2 (Buy) and have a VGM score of ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. You can see the complete list of today’s Zacks #1 Rank stocks here.
Bank of America Corp (BAC) provides banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments. Bank of America has a price-to-earnings ratio (P/E) of 13.22, compared with 14.80 for the industry.
The company declined 2.6% in the last three trading days. But, its expected growth rate for the current year is 15.4%, more than the industry’s projected gain of 9.9%.
Eagle Bancorp Montana Inc (EBMT) provides various retail banking products and services in Montana. The company has a price-to-earnings ratio (P/E) of 15.10, compared with 17.30 for the industry.
Eagle Bancorp Montana lost 1.9% over the last three trading days. However, its expected growth rate for the current year is 8.3%, higher than the industry’s projected gain of 5.4%.
MidWestOne Financial Group fell 3.2% in the last three trading days. However, its expected growth rate for the current year is 31.5%, more than the industry’s projected 11.2%.
Triumph Bancorp Inc (TBK) provides banking and commercial finance products to businesses in the U.S. The company has a price-to-earnings ratio (P/E) of 15.94, compared with 20.20 for the industry.
The company declined 2.9% over the last three trading days. However, its expected growth rate for the current year is 45.6%, more than the industry’s projected 12.3%.
Regions Financial Corp (RF) provides banking and bank-related services to individual and corporate customers in the U.S. The company has a price-to-earnings ratio (P/E) of 15.01, compared with 20.20 for the industry.
Regions Financial dropped almost 1% over the last three trading days. However, it is expected to grow at a solid rate of 11.7% this year.
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