Somewhat quietly, bank stocks have gone on a big run. Investors have shown particular optimism toward regional banks.
Indeed, on the whole, financials have done well of late. The Financial Sector Sector SPDR Fund (NYSEARCA:XLF) has gained 5% over the past month. But those returns have been dwarfed by regional bank stocks. The SPDR S&P Regional Banking ETF (NYSEARCA:KRE) has soared 21%, and the iShares US Regional Banks ETF (NYSEARCA:IAT) 17%.
To some extent, the regional banks are just catching up. XLF still has outperformed year-to-date with a 20% decline against 27% and 28% for IAT and KRE, respectively. Near-zero interest rates, and lowered long-term expectations, have pressured the entire sector. Macroeconomic fears have hurt as well.
But regional banks are showing some strength, particularly in the recent round of earnings reports. Indeed, those reports are a key reason (though not the only reason) why the group has performed so well of late. Credit losses appear manageable, and earnings look better than expected — and certainly better than feared.
It’s not just regionals that rallied off earnings, though the biggest banks struggled. JPMorgan Chase (NYSE:JPM), as has been its pattern, beat earnings estimates yet saw its stock do little. Citigroup (NYSE:C) saw much the same. Bank of America (NYSE:BAC), meanwhile, sold off after soft top-line performance, as did Wells Fargo (NYSE:WFC).
One big bank (albeit not an American one), however, bucked the trend. It was one of the four bank stocks that look like the biggest winners from earnings:
- Barclays (NYSE:BCS)
- First Internet Bancorp (NASDAQ:INBK)
- CNB Financial (NASDAQ:CCNE)
- Texas Capital Bancshares (NASDAQ:TCBI)
Bank Stocks: Barclays (BCS)
Barclays stock rose a healthy 6% after reporting earnings. There could be more upside ahead.
What looks positive about the report isn’t just that Barclays topped analyst expectations. It’s how the bank did so. Trading profits were substantial: almost half the average of the five major Wall Street banks. Loss provisions were lower than expected.
Across the board, this seems like a quarter that suggests that Barclays can manage through not just the headwinds of the novel coronavirus pandemic, but a long-running restructuring and the effects of Brexit. The strength in the report should calm calls from an activist investor to exit the investment banking business and could lead to a reinstatement of the Barclays dividend.
There’s a case that a 6% rally doesn’t incorporate all that good news. BCS stock still is down 40% so far this year, and 63% over the past five. With a couple more reports like Friday’s, the long-awaited bottom might finally be in.
First Internet Bancorp (INBK)
Internet banking hasn’t quite taken off the way that proponents believed it would. The likes of Axos Financial (NYSE:AX), formerly known as Bank of the Internet, and Ally Financial (NYSE:ALLY) have seen their stocks flatline amid relatively modest growth.
First Internet hasn’t been an exception. INBK stock cleared $40 in late 2017, but traded at $14 just last month. But a blowout earnings report last week suggests that perhaps this Internet company is a pandemic winner as well.
Indeed, First Internet saw revenue increase 48% quarter-over-quarter. Net interest margin actually increased q/q thanks to lower deposit rates. And the company, despite the pandemic and despite lower interest rates, achieved record net income in Q3.
As a result, INBK soared 15% after earnings — a huge jump for a financial stock. The rally has continued since, and might keep going. INBK stock still is down 2% this year, and at 9x trailing earnings and 0.73x book value doesn’t yet look close to expensive. If the third quarter numbers are a sign of what’s to come, the recent performance of First Internet stock might prove the same.
CNB Financial (CCNE)
One of the smallest regional banking stocks was one of the biggest winners from earnings. In four sessions, CCNE stock rallied 19% following last week’s release.
CNB’s report wasn’t nearly as impressive as that of First Internet — but there are obvious reasons for optimism. Excluding one-time costs, CNB managed to grow earnings per share year-over-year. Most notably, the total of deferred loan payments (due to the pandemic) plunged 70% between Jun. 30 and Oct. 20.
Normalcy seems to be returning. A preferred stock offering strengthened the balance sheet (albeit while diluting shareholders). CCNE stock, too, seems reasonably cheap, and a 3.4% dividend yield offers income.
It is possible, however, that the rally has mostly run its course. The stock is heading back toward resistance that held firmly in late May and mid-June. Valuation is attractive but not outrageously so in the context of a cheap sector and rate-related headwinds.
Still, credit should be given where it’s due. CNB clearly is headed in the right direction.
Texas Capital Bancshares (TCBI)
For Texas Capital, Q3 doesn’t look nearly as impressive. Net income declined 35% year-over-year. Return on equity dropped to 8.24% from 13.21% the year before.
But as with the rest of its group, the report looks good enough in context. Total deposits increased 17% year-over-year, suggesting market share gains. Loss provisions were up sharply y/y (a key reason for lower net income) but much improved against second quarter levels.
In other words, the worst seems to be over. And that sets up an attractive longer-term case for a bank with a footprint in one of the country’s fastest-growing states. TCBI isn’t as cheap as other earnings winners in the sector, but it’s still cheap enough if investors are set to look beyond 2020 to better days ahead. The rally in recent sessions suggests that’s the case.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
