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Zacks Industry Outlook Highlights: JPMorgan, Bank of America, Citigroup and Financial Select Sector SPDR fund
Read MoreHide Full Article
For Immediate Release
Chicago, IL – November 3, 2017 – Today, Zacks Equity Research discusses the Industry: U.S. Banks, Part 1, including JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Financial Select Sector SPDR fund (XLF - Free Report) .
The sequentially weaker third-quarter earnings might transitorily hinder the momentum gained by bank stocks since the passage of the Financial CHOICE Act in the House in June and the Treasury’s presentation of its plans to streamline the nation’s banking system.
However, while the proposed wholesale regulatory reform (a full-scale repeal of Dodd-Frank) still awaits action in the Senate, investors’ optimism over a relief to the banking industry caused by repeal should keep the momentum in bank stocks alive. Essentially, lesser regulation will notably reduce the fixed costs that banks are struggling with for long.
This coupled with the impact of a rising rate environment, strengthening U.S. dollar and steady GDP growth on banks’ top line should drive bank stocks higher. Investors’ optimism over potential tax reforms as well as the Federal Reserve’s plans to unwind its giant balance sheet will be the other important catalysts.
Though there are a few troubles in the industry, including defaults in the areas of auto and student loans, these should be outweighed by positive economic trends such as rising wages and falling unemployment, and positive industry trends like low mortgage and credit card default rates.
Banks’ results for the July-September period don’t indicate the industry’s growth potential. In fact, similar to the prior quarter, the backdrop wasn’t favorable for banks as evident from the results of the mega players — including JPMorgan ((JPM - Free Report) ), Bank of America ((BAC - Free Report) ) and Citigroup ((C - Free Report) ). However, the optimism over the industry’s prospects helped the stocks to outperform the broader markets over the past six months.
The Zacks Major Regional Banks Industry has rallied 11.6% over the past six months versus the 7.5% gain of the S&P 500. Also, the Financial Select Sector SPDR fund (XLF - Free Report) , a top bank ETF, has gained about 12.5% over this period.
How Long Do Banks Need to Wait for a Rebound?
A lot depends on when and in what capacity the wave of financial deregulation falls on the industry.
A rising rate environment — at the expected pace — itself has the potential to take banks’ profitability to higher levels through sustained expansion in net interest margins. So it might not take long for the industry to thrive. However, for receiving a bigger boost, corporate tax and financial regulatory reforms have to be in play.
While chances of a full-scale regulatory reform getting clearance in the Senate are dim, any permitted change will take years to get fully implemented. We don’t expect any impact of the likely changes on banks’ costs and profitability through the end of this year, considering the progress so far.
Benefits from Monetary Policy Should Intensify
Yields on key earning-assets — securities and loans — are expected to rise as interest rates move higher. But a material improvement in margins will depend on the extent to which higher rates put pressure on funding costs — particularly, costs of maintaining deposits. Also, increasing competition will lead to weakening credit quality in the long run.
Considering the industry’s current interest rate sensitivity level, which isn’t impressive as banks have yet to fully return to the rate-dependency level that they trimmed in a prolonged low rate environment, we don’t expect increase in deposit costs and weakening credit quality to significantly mitigate the benefits of higher yields from earning assets. So margins are expected to expand materially in the next couple of years.
Further, the gradual winding down of the Federal Reserve’s $4.5 trillion balance sheet will likely benefit banks in a number of ways, primarily by putting upward pressure on interest rates.
Current Business Trends Show Recovery
Lending: Loan growth at commercial banks rebounded in the last two quarters. According the Federal Reserve’s latest data, commercial banks saw 4.1% and 4.5% annualized growth in loans and leases in Q2 and Q3, respectively, after a sharp decline to 0.9% in Q1. However, the current growth is weaker than the rates seen by the industry in 2015 and 2016. While growth in consumer and real estate loans significantly contributed to the recent rebound, commercial and industrial loan growth remains weak.
Continued uncertainty over Trump’s “wish list” getting clearance and cheaper ways to borrow are among the factors that could keep loan growth sluggish in the months ahead. However, wage growth and higher disposable income as a result of an improving economy should eventually push up demand for retail and small business loans.
Deposits: Relatively less-levered consumers and businesses kept the deposit scenario better than loans. The last three quarters saw a decelerating deposit growth rate, but the rates don’t compare unfavorably with what the industry saw in the last two years. While there is no foreseeable factor that can reduce demand for deposits in the near term, the Fed’s moves will keep increasing competition for deposits.
Expenses: Expense reduction, which has long held the key to remain profitable, may not be a major support going forward, as banks have already cut the majority of unnecessary expenses. However, the results for the last few quarters show some respite from high legal costs.
Scrutiny on the business model of banks and their targeted M&A deals could lead to some compliance costs. Also, technology costs will keep on increasing.
Key Business Segments Yet to Show Steadiness
Mortgage Business: As the refinance boom nears its end with the interest rates moving higher, refinancing activities should decline. The Mortgage Bankers Association (MBA) expects refinance originations to decrease more than 28% year-over-year in 2018.
However, the MBA projects purchase mortgage originations to increase more than 7% with more availability of mortgage credit to qualified borrowers amid a decent growth in job and wage.
Overall, the MBA forecast calls for a decline in mortgage originations in 2018.
Trading Activity: Trading activities remained sluggish in the last two quarters, primarily in the absence of any tangible progress on the reforms proposed by the Trump administration, lesser geopolitical tensions and a predictable monetary policy standpoint of the Fed.
Strong Stocks that Should Be in the News
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has nearly tripled the market from 1988 through 2015. Its average gain has been a stellar +26% per year.See these high-potential stocks free >>.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights: JPMorgan, Bank of America, Citigroup and Financial Select Sector SPDR fund
For Immediate Release
Chicago, IL – November 3, 2017 – Today, Zacks Equity Research discusses the Industry: U.S. Banks, Part 1, including JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Financial Select Sector SPDR fund (XLF - Free Report) .
Industry: U.S. Banks, Part 1
Link: https://www.zacks.com/commentary/135162/u.s.-banks-stock-outlook---november-2017
The sequentially weaker third-quarter earnings might transitorily hinder the momentum gained by bank stocks since the passage of the Financial CHOICE Act in the House in June and the Treasury’s presentation of its plans to streamline the nation’s banking system.
However, while the proposed wholesale regulatory reform (a full-scale repeal of Dodd-Frank) still awaits action in the Senate, investors’ optimism over a relief to the banking industry caused by repeal should keep the momentum in bank stocks alive. Essentially, lesser regulation will notably reduce the fixed costs that banks are struggling with for long.
This coupled with the impact of a rising rate environment, strengthening U.S. dollar and steady GDP growth on banks’ top line should drive bank stocks higher. Investors’ optimism over potential tax reforms as well as the Federal Reserve’s plans to unwind its giant balance sheet will be the other important catalysts.
Though there are a few troubles in the industry, including defaults in the areas of auto and student loans, these should be outweighed by positive economic trends such as rising wages and falling unemployment, and positive industry trends like low mortgage and credit card default rates.
Banks’ results for the July-September period don’t indicate the industry’s growth potential. In fact, similar to the prior quarter, the backdrop wasn’t favorable for banks as evident from the results of the mega players — including JPMorgan ((JPM - Free Report) ), Bank of America ((BAC - Free Report) ) and Citigroup ((C - Free Report) ). However, the optimism over the industry’s prospects helped the stocks to outperform the broader markets over the past six months.
The Zacks Major Regional Banks Industry has rallied 11.6% over the past six months versus the 7.5% gain of the S&P 500. Also, the Financial Select Sector SPDR fund (XLF - Free Report) , a top bank ETF, has gained about 12.5% over this period.
How Long Do Banks Need to Wait for a Rebound?
A lot depends on when and in what capacity the wave of financial deregulation falls on the industry.
A rising rate environment — at the expected pace — itself has the potential to take banks’ profitability to higher levels through sustained expansion in net interest margins. So it might not take long for the industry to thrive. However, for receiving a bigger boost, corporate tax and financial regulatory reforms have to be in play.
While chances of a full-scale regulatory reform getting clearance in the Senate are dim, any permitted change will take years to get fully implemented. We don’t expect any impact of the likely changes on banks’ costs and profitability through the end of this year, considering the progress so far.
Benefits from Monetary Policy Should Intensify
Yields on key earning-assets — securities and loans — are expected to rise as interest rates move higher. But a material improvement in margins will depend on the extent to which higher rates put pressure on funding costs — particularly, costs of maintaining deposits. Also, increasing competition will lead to weakening credit quality in the long run.
Considering the industry’s current interest rate sensitivity level, which isn’t impressive as banks have yet to fully return to the rate-dependency level that they trimmed in a prolonged low rate environment, we don’t expect increase in deposit costs and weakening credit quality to significantly mitigate the benefits of higher yields from earning assets. So margins are expected to expand materially in the next couple of years.
Further, the gradual winding down of the Federal Reserve’s $4.5 trillion balance sheet will likely benefit banks in a number of ways, primarily by putting upward pressure on interest rates.
Current Business Trends Show Recovery
Lending: Loan growth at commercial banks rebounded in the last two quarters. According the Federal Reserve’s latest data, commercial banks saw 4.1% and 4.5% annualized growth in loans and leases in Q2 and Q3, respectively, after a sharp decline to 0.9% in Q1. However, the current growth is weaker than the rates seen by the industry in 2015 and 2016. While growth in consumer and real estate loans significantly contributed to the recent rebound, commercial and industrial loan growth remains weak.
Continued uncertainty over Trump’s “wish list” getting clearance and cheaper ways to borrow are among the factors that could keep loan growth sluggish in the months ahead. However, wage growth and higher disposable income as a result of an improving economy should eventually push up demand for retail and small business loans.
Deposits: Relatively less-levered consumers and businesses kept the deposit scenario better than loans. The last three quarters saw a decelerating deposit growth rate, but the rates don’t compare unfavorably with what the industry saw in the last two years. While there is no foreseeable factor that can reduce demand for deposits in the near term, the Fed’s moves will keep increasing competition for deposits.
Expenses: Expense reduction, which has long held the key to remain profitable, may not be a major support going forward, as banks have already cut the majority of unnecessary expenses. However, the results for the last few quarters show some respite from high legal costs.
Scrutiny on the business model of banks and their targeted M&A deals could lead to some compliance costs. Also, technology costs will keep on increasing.
Key Business Segments Yet to Show Steadiness
Mortgage Business: As the refinance boom nears its end with the interest rates moving higher, refinancing activities should decline. The Mortgage Bankers Association (MBA) expects refinance originations to decrease more than 28% year-over-year in 2018.
However, the MBA projects purchase mortgage originations to increase more than 7% with more availability of mortgage credit to qualified borrowers amid a decent growth in job and wage.
Overall, the MBA forecast calls for a decline in mortgage originations in 2018.
Trading Activity: Trading activities remained sluggish in the last two quarters, primarily in the absence of any tangible progress on the reforms proposed by the Trump administration, lesser geopolitical tensions and a predictable monetary policy standpoint of the Fed.
Strong Stocks that Should Be in the News
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has nearly tripled the market from 1988 through 2015. Its average gain has been a stellar +26% per year.See these high-potential stocks free >>.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.