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Revisiting the Trump Trade: Zacks Industry Rank Analysis

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The 16-company strong Major Regional Bank industry stands out in Zacks Industry Ranks -- these late spring days. The niche ranked #47 out of 265 Zacks industries this week. That rank was #35 last week. For the final spring week of April, I count 6 upside analyst earnings revisions and just 2 downside revisions.

What have Regional Bank share prices done -- recently? To answer succinctly, study the group’s top Exchange Traded Fund (ETF) trading performance.

The iShares U.S. Regional Bank ETF (IAT) shot up from $36 a share --at the time of the U.S. Presidential Election-- to $46 by the end of 2016. The ETF then hit a spiky high of $49 a share on March 1st. Now, shares trade at $45.

That’s a ‘Tell’ -- Regional Banks are an outstanding example of a ‘Trump Trade.’

What does that mean? It meant that last November, covering analysts thought the new business-friendly President would provide broad tangible earnings upside across this group of companies. Given the spurt-up in share prices, traders drank that policy-driven Koolaid too.

For this banking niche, Trump Trade tangible benefits took two forms. One was a lower corporate tax rate, enhancing profit margins. The second was less Dodd-Frank regulation, cutting costs.

In late April, after a March Fed rate hike enhanced bank interest margins, Zacks still ranks this top Regional Bank ETF a #1 Rank (STRONG BUY). The ETF dividend yield rests at 1.46%. With respect to specific ETF share holdings we care about for this piece, PNC is a high 11.2% ETF weight. Comerica is 2.35% weight. Northern Trust is not included.

Finally, realize this -- covering analyst’s annual forward earnings estimate revisions drive our Zacks Rank system. In light of that reality, let’s take a very close look into what one leading analyst covering this banking niche had to say.

A Covering Analyst’s View

Matt Olney is a regional banking analyst. He works at the respected banking boutique investment firm Stephens. He made these comments to Barron’s on Jan 10th, 2017--

 “For the community and regional banks, we did some work within our coverage and over 80% of those today are trading above their average levels on price-to-tangible book value [TBV]. That’s not to say they are too expensive, it just means we’re at the high end of historical valuations—and I can make a case that we probably belong there.

It can be warranted, but it assumes lots of macro tailwinds that are still coming into focus. So, for example, higher interest rates are great for these community and regional banks, and it feels like at this point, the valuations assume some benefits from that. And as a whole, the bank sector stands to benefit more than most other sectors if there is a move to lower corporate tax rates.

Those two things are probably the biggest drivers. Then within them there are some soft items, call them regulatory expenses. It is tough to understand exactly how much the regulatory issues have affected the banks. There have been higher expenses, and it kind of distracts the executives.

At this point all signs suggest that [reforms] are moving forward and there is going to be some benefit to the banks to a certain degree. I just can’t tell you how much it is going to be, how many more rate moves we’re going to see, or how low corporate taxes are going to be.

But there is risk at this point that those two items don’t come through as positively as we’re hoping. There is risk that the banks have some downside if those two items don’t see results we’re looking for.

So it is time to be more selective. It is time to go and look at some banks that can benefit in this current environment and not just wait around for higher rates and lower corporate tax rates.”

My Thoughts

With the latest pullback in the iShares Regional Bank ETF, one has to ask the question? Are traders becoming more skeptical on the benefits of the Trump Trade? In particular, are they revisiting policy changes that matter to Regional Banks? Are proposed corporate tax cuts getting less tasty? Are proposed Dodd-Frank reform benefits getting downsized?¿¿¿

Tidy answers are not forthcoming. Maybe the latest share price pullback was an overdue profit-taking exercise. The 6 positive analyst estimate revisions in late April -- after Trump held a press conference offering a proposed 15% rate on corporate taxes -- did generate modest excitement.

Nonetheless, let’s take the advice of Stephens’ regional banking analyst, Mr. Olney. Be more selective with your Regional Bank picks.

3 Top Zacks Rank Picks in Regional Banking--

(1) Comerica (CMA - Free Report) :
This is a Zacks #1 Rank (STRONG BUY) stock. Of 10 covering analysts, there have been 10 upside revisions in recent weeks. That speaks for itself.  What were the estimate revisions? 2017 annual earnings went from $4.77 30 days ago to $5.06 now (+0.29 cents).

However, the long-term Zacks VGM score is F, with a D in Value and an F in Growth. The Price to Earnings Growth (PEG) ratio is 1.65. The forward P/E is 15.65. Those are OK. The annual dividend is 1.3%. The next earnings report should land on July 18th.

Comerica Inc. is a registered bank holding company. Its operations made up of three lines of business: Business Bank, Individual Bank and Investment Bank.

The Business Bank is comprised of middle market lending, asset-based lending, large corporate banking, treasury management and international financial services. The Individual Bank includes consumer lending, consumer deposit gathering, mortgage loan origination and servicing, small business banking and private banking. The Investment Bank is responsible for the sale of mutual fund and annuity products.

(2) Northern Trust (NTRS - Free Report) : This is a Zacks #2 Rank (BUY) stock. Of 5 covering analysts, there have been 5 upside revisions in recent weeks. That speaks for itself. What were the estimate revisions? 2017 annual earnings went from $5.43 30 days ago to $5.44 now (+0.10 cents).

Again, we have a weak long-term soore, with the long-term Zacks VGM score at D, with a D in Value and a B in Growth. The Price to Earnings Growth (PEG) ratio is 2.39. The forward P/E is 19.12. Those are high for a bank. The annual dividend is 1.66%. The next earnings report should land on July 19th.

Northern Trust Corp. is a multi-bank holding company with worldwide locations and is a provider of treasury management, master trust, custody, retirement, risk and performance, international and investment management services for corporations, large institutions and individuals.

Northern Trust has earned distinction as a leading provider of personal fiduciary, asset management, personal and private banking, and master trust/custody, global custody and treasury management services.

(3) PNC Financial Services Group (PNC - Free Report) : This is a Zacks #2 Rank (BUY) stock. Of 7 covering analysts, there have been 7 upside revisions in recent weeks. What were the estimate revisions? 2017 annual earnings went from $8.74 30 days ago to $8.98 now (+0.22 cents).

Again, the long-term Zacks VGM score is D, with a C in Value and a D in Growth. The Price to Earnings Growth (PEG) ratio is 1.96. The forward P/E is 14.84. The annual dividend is 1.82%. The next earnings report should land on July 21st.

The PNC Financial Services Group, Inc. is one of the nation's largest diversified financial services organizations, providing regional banking, corporate banking, real estate finance, asset-based lending, wealth management, asset management and global fund services.

In-Depth Zacks Research for the Tickers Above

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The PNC Financial Services Group, Inc (PNC) - free report >>

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