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Bank Earnings are Rising, but Look Past the Obvious Players
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It’s a great environment for banks in the U.S. right now. Interest rates are rising, corporate taxes have been reduced, costly regulations are being relaxed and a robust economy is increasing both deposits and the demand for loans.
Economists expect three Federal Reserve short-term interest rate hikes each in 2018, 2019 and 2020, suggesting that the positive interest rate environment for banks will continue to steadily improve.
The Bulge-Bracket
Q1 earnings at the nation’s four biggest banks – Citigroup (C - Free Report) , Bank of America (BAC - Free Report) , Wells Fargo (WFC - Free Report) and J.P. Morgan Chase (JPM - Free Report) were the highest they’ve been in over ten years. Earnings estimates for the full year are rising as well, with the Zacks Consensus Estimate for 2018 up between 10% and 39% over 2017 at the big 4 mega-banks.
Earnings at the giant banks are the result of a diverse set of business activities, including many that are outside of traditional banking services. Trading, investment banking, and asset management all contribute meaningfully to earnings. In Q1 specifically, increased volatility in the Equity markets resulted in out-sized trading profits, with JPM, BAC and C all reporting record revenues from equity trading.
Volatility can be unpredictable, however, and while these banks have positive exposure to it, it’s difficult to know when exactly increased trading profits might occur in the future.
Traditional, Regional Banks
Smaller banks that concentrate on a more typical bank model of accepting deposits and making loans also benefit from the current environment. Two factors are currently working in their favor: a greater volume of both deposits and loans in an expansionary economic environment, and a widening of the spread – the difference between the rates at which banks borrow and lend – as interest rates rise.
Let’s take a look at five regional banks across the country with accelerating earnings and forecasts. These banks are in the middle of the market with market capitalizations between $500M and $7B. Each of these stock is a Zacks Rank #1 (Strong Buy).
Northeast
Atlantic Capital Bancshares, Inc operates in the Northeast and offers all of the services normally associated with traditional banks – checking and savings deposits, CDs, personal and commercial loans and lines of credit, credit cards and online banking and bill payments.
Earnings are growing thanks to favorable conditions in all of these core areas and Atlantic Bancshares. The Zacks Consensus Earnings Estimate for 2018 now stands at $0.97/share, an 83% increase over profits in 2017. The stock has performed well, rising 20% since November 2017, resulting in a Zacks Momentum Style Score of “A”.
Midwest
Also involved primarily in traditional banking services, Associated Banc-Corp (ASB - Free Report) serves the Midwest with offices in Wisconsin, Illinois and Minnesota. Beating Q1 estimates by 22%, Associated Banc-Corp has seen 9 upward earnings revisions in the past 30 days. Thanks to the favorable market conditions, non-performing assets and provisions for credit losses both declined significantly from the prior year.
At its current share price of $26, ASB is also a strong value proposition. Forward P/E ratio, Price to Free Cash Flow, Price to Book and Price to Sales are all below industry averages.
Southwest
Shares in Texas-based Cullen/Frost Bankers Inc. (CFR - Free Report) have handily outperformed the broad markets this year, rising 21% YTD while the S&P 500 has been essentially flat.
Analysts have taken notice of the improved earnings situations at CFR with 8 upward revisions in the past 30 days brings the Zacks Consensus Estimate to $6.60/share, 21% higher than the $5.45 they earned in 2017.
Southeast
Georgia’s Synovus Financial Corp (SNV - Free Report) , reported a first quarter earnings beat last week ($0.86/share versus and expected $0.76/share and just $0.56/share a year ago) and also highlighted Improvements in Revenue, Loans, Deposits Net Interest Margin and improvements in the credit quality of its loan portfolio.
Synovus continued a $150M share repurchase program, buying $27M in stock during the quarter and increased the quarterly dividend 67% to $0.25.
Predictably, estimates for the next quarter and full year are rising, with SNV now expected to post $3.55/share in 2018, 40% higher than 2017.
West Coast
Finally, Los Angeles-based PacWest Bancorp primarily serves the business sector, offering commercial banking services, including real estate, construction and commercial loans and cash flow solutions to small and medium sized businesses across multiple industries.
Expected to earn $3.68/share in 2018, up from $2.92/share last year, PacWest also has a very favorable Price to Free Cash Flow Ratio (13 vs. 20.1 for the industry) which has allowed it to pay an attractive dividend - just raised to $0.60/quarter, or over 4%/year at the current stock price of $51.
After making a Macro Hypothesis about business conditions, it can be helpful to focus on companies that have the most direct exposure to your expectations. In the case of rising rates and economic growth, these medium-sized regional banks are right in the crosshairs.
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Bank Earnings are Rising, but Look Past the Obvious Players
It’s a great environment for banks in the U.S. right now. Interest rates are rising, corporate taxes have been reduced, costly regulations are being relaxed and a robust economy is increasing both deposits and the demand for loans.
Economists expect three Federal Reserve short-term interest rate hikes each in 2018, 2019 and 2020, suggesting that the positive interest rate environment for banks will continue to steadily improve.
The Bulge-Bracket
Q1 earnings at the nation’s four biggest banks – Citigroup (C - Free Report) , Bank of America (BAC - Free Report) , Wells Fargo (WFC - Free Report) and J.P. Morgan Chase (JPM - Free Report) were the highest they’ve been in over ten years. Earnings estimates for the full year are rising as well, with the Zacks Consensus Estimate for 2018 up between 10% and 39% over 2017 at the big 4 mega-banks.
Earnings at the giant banks are the result of a diverse set of business activities, including many that are outside of traditional banking services. Trading, investment banking, and asset management all contribute meaningfully to earnings. In Q1 specifically, increased volatility in the Equity markets resulted in out-sized trading profits, with JPM, BAC and C all reporting record revenues from equity trading.
Volatility can be unpredictable, however, and while these banks have positive exposure to it, it’s difficult to know when exactly increased trading profits might occur in the future.
Traditional, Regional Banks
Smaller banks that concentrate on a more typical bank model of accepting deposits and making loans also benefit from the current environment. Two factors are currently working in their favor: a greater volume of both deposits and loans in an expansionary economic environment, and a widening of the spread – the difference between the rates at which banks borrow and lend – as interest rates rise.
Let’s take a look at five regional banks across the country with accelerating earnings and forecasts. These banks are in the middle of the market with market capitalizations between $500M and $7B. Each of these stock is a Zacks Rank #1 (Strong Buy).
Northeast
Atlantic Capital Bancshares, Inc operates in the Northeast and offers all of the services normally associated with traditional banks – checking and savings deposits, CDs, personal and commercial loans and lines of credit, credit cards and online banking and bill payments.
Earnings are growing thanks to favorable conditions in all of these core areas and Atlantic Bancshares. The Zacks Consensus Earnings Estimate for 2018 now stands at $0.97/share, an 83% increase over profits in 2017. The stock has performed well, rising 20% since November 2017, resulting in a Zacks Momentum Style Score of “A”.
Midwest
Also involved primarily in traditional banking services, Associated Banc-Corp (ASB - Free Report) serves the Midwest with offices in Wisconsin, Illinois and Minnesota. Beating Q1 estimates by 22%, Associated Banc-Corp has seen 9 upward earnings revisions in the past 30 days. Thanks to the favorable market conditions, non-performing assets and provisions for credit losses both declined significantly from the prior year.
At its current share price of $26, ASB is also a strong value proposition. Forward P/E ratio, Price to Free Cash Flow, Price to Book and Price to Sales are all below industry averages.
Southwest
Shares in Texas-based Cullen/Frost Bankers Inc. (CFR - Free Report) have handily outperformed the broad markets this year, rising 21% YTD while the S&P 500 has been essentially flat.
Analysts have taken notice of the improved earnings situations at CFR with 8 upward revisions in the past 30 days brings the Zacks Consensus Estimate to $6.60/share, 21% higher than the $5.45 they earned in 2017.
Southeast
Georgia’s Synovus Financial Corp (SNV - Free Report) , reported a first quarter earnings beat last week ($0.86/share versus and expected $0.76/share and just $0.56/share a year ago) and also highlighted Improvements in Revenue, Loans, Deposits Net Interest Margin and improvements in the credit quality of its loan portfolio.
Synovus continued a $150M share repurchase program, buying $27M in stock during the quarter and increased the quarterly dividend 67% to $0.25.
Predictably, estimates for the next quarter and full year are rising, with SNV now expected to post $3.55/share in 2018, 40% higher than 2017.
West Coast
Finally, Los Angeles-based PacWest Bancorp primarily serves the business sector, offering commercial banking services, including real estate, construction and commercial loans and cash flow solutions to small and medium sized businesses across multiple industries.
Expected to earn $3.68/share in 2018, up from $2.92/share last year, PacWest also has a very favorable Price to Free Cash Flow Ratio (13 vs. 20.1 for the industry) which has allowed it to pay an attractive dividend - just raised to $0.60/quarter, or over 4%/year at the current stock price of $51.
After making a Macro Hypothesis about business conditions, it can be helpful to focus on companies that have the most direct exposure to your expectations. In the case of rising rates and economic growth, these medium-sized regional banks are right in the crosshairs.