Bank stocks have been in the spotlight since the announcement of U.S Presidential election results in November 2016. While the overall financial performance of banks has not been that impressive owing to a tough operating backdrop, the future looks bright.
Driven by investors’ interest, price performance of banks has been impressive. Since the Presidential election results, banks have outperformed the Zacks Finance sector.
Notably, at the same time, this has made bank stocks a bit expensive. So, should one be betting on the stocks though these are expensive? Well, the answer is a yes.
Factors to Keep the Momentum Alive
Favorable rate hike scenario: If the Federal Reserve sticks to its plan of increasing rates three times in 2018, it will further help banks in expanding net interest margin. This along with rise in loan demand will eventually drive revenue growth.
With the inflation rate improving, there are chances of aggressive rate hikes by the Fed. In fact, the Fed minutes of the January FOMC meeting point in that direction. The report highlighted that improving economic growth, stimulus from the tax cuts and rise in inflation support a more aggressive stance by the Fed in hiking rates.
So, banks are anticipated to benefit further.
Lower tax rates: All sectors are likely to benefit from the lower tax rates with banks expected to gain the most as they are amongst the highest tax payers in the United States.
Also, driven by the tax legislation provisions related to repatriation of overseas cash, banks will be in a win-win situation. This is because, as overseas cash is brought back, it will likely provide an impetus to M&As activities, thereby giving a boost to investment banking. Also, as the act will lower tax rates for wealthy individuals, asset management units of these banks are projected to witness a rise in fund inflow.
Potential lesser regulation: Growing investor optimism related to lesser regulations is likely to boost bank stocks. While no time frame has been outlined for the execution, the announcement of a bipartisan agreement has helped investors regain confidence. This will help banks in reducing regulatory compliance costs and will likely to lead to a wave of M&As for the banking industry.
Upbeat earnings expectations: Earnings for major banks and banks & thrifts are expected to accelerate in 2018 with growth of 22.8% and 27.9%, respectively, compared with 7.5% rise for the Finance sector.
Choosing the Winning Bank Stocks
The banking industry, as a whole, is likely to gain from the favorable factors. So, it is not an easy task to find the potential winners that will continue witnessing upward momentum.
Therefore, we have taken the help of the Zacks Stock Screener to shortlist stocks that have market capitalization of more than $1 billion and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).
To further cut short the list, we picked those stocks that have witnessed positive earnings estimate revisions of 1% or more for 2018 over the past four weeks. Further, these banks are expected to record earnings growth of 25% or more this year.
Also, the stocks have a Momentum Score of A or B. Our research shows that stocks with a Style Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are the three banks stocks that met all the criteria:
Sporting a Zacks Rank #1, M&T Bank Corporation’s (NYSE:MTB) current-year earnings estimates moved 1% upward over the last four weeks. Further, with a Momentum Score of B and market cap of $25.4 billion, the company’s 2018 earnings are projected to grow at the rate of 30.5%.
First Interstate BancSystem Inc (NASDAQ:FIBK), with a Zacks Rank #2 and Momentum Score of A, has witnessed its current-year earnings estimates moving 4.9% upward over the last 30 days. Also, the bank, with a market cap of $2.2 billion, is projected to record 47.8% year-over-year earnings growth in 2018.
Current-year earnings estimates for IBERIABANK Corp (NASDAQ:IBKC), with a market cap of $4.1 billion, have moved 4.1% upward over the last 30 days. The bank, carrying a Zacks Rank #2 and Momentum Score of B, is expected to record earnings growth of 42.5% this year.
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