The Zacks Major Regional Banks industry includes the nation’s largest banks by assets — most operating globally. Financial performance of these banks largely depends on the nation’s economic health. As the banks are involved in a number of complex financial activities, they are required to meet the stringent regulations set by the Federal Reserve and other agencies.
Along with traditional banking services, which are the source of interest income, major regional banks provide a wide array of financial services and products to retail, corporate and institutional clients, both domestic and global. The services offered include credit and debit cards, wealth management and investment banking, among others. Therefore, a large source of revenues for these banks is fees and commission earned from these services.
Prominent names in this industry are BB&T Corp BBT, Bank of America BAC, Comerica CMA, Fifth Third Bancorp FITB, KeyCorp KEY, M&T Bank MTB, Northern Trust NTRS, State Street STT, SunTrust Banks , BNY Mellon BK, U.S. Bancorp USB and Wells Fargo WFC.
Here are the three major industry themes:
- Major regional banks significantly benefit from higher interest rates. After raising interest rates four times in 2018, the Fed reversed its stance and cut rates in July, September and October this year. Though it is widely expected that there will be no further rate cuts when the Fed officials meet next week, the three cuts have largely offset the favorable impact of last year’s higher rates. Though several macroeconomic matters, including the ongoing U.S.-China trade conflict, Brexit ambiguity and global slowdown fears have adversely impacted business sentiments, strength in the economy and moderate loan demand are likely to support banks’ net interest margin and net interest income to some extent.
- These banks are investing considerably in AI and other digital platforms to improve their online and mobile banking services, and ward off competition from Fintech and other large tech companies. In fact, banks like Bank of America and JPMorgan have been successful in offering customized digital services. While technological investments are expected to result in a rise in operating costs to some extent in the near term, the efforts will help banks save time and provide less error-prone services.
- Gradual easing of stringent regulations by the Fed has resulted in increased financial flexibility for these banks. With declining compliance costs, banks are able to utilize the freed-up capital to generate more revenues and expand operations (both organically and through acquisitions). These initiatives are expected to support profitability amid a dismal rate scenario.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Major Regional Banks industry is a 16-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #100, which places it in the top 40% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since September-end, the industry’s earnings estimates for the current year have been revised upward by nearly 1%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Major Regional Banks industry has outperformed the S&P 500 composite and its own sector over the past year.
While the stocks in this industry have collectively gained 16.6% over this period, the Zacks S&P 500 composite rallied 13.8% and the Zacks Finance sector have increased 8%.
One-Year Price Performance
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 2.27X. This compares with the highest level of 2.68X, lowest level of 1.44X and median of 2.10X over the past five years. Additionally, the industry is trading at a discount when compared to the market at large, as the trailing 12-month P/TBV for the S&P 500 composite is 11.03X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a lower P/TBV ratio, comparing major regional banks with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 2.63X for the same period is slightly above the Zacks Major Regional Banks industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
Lower interest rates a major concern for these banks. Also, the support major banks received from manageable expense levels might not continue, as investments in technology and efforts to find new avenues will gradually lead to higher expenses.
Nonetheless, the operating backdrop may turn less challenging with the easing of regulatory supervision. Also, major regional banks will benefit from strategic initiatives, decent loan demand and improving domestic economy in the near term.
Thus, investors may keep an eye on a few major regional bank stocks given their strong earnings outlook.
None of the stocks in the Zacks Major Regional Bank space currently sports a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). So, we are presenting three stock with a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank stocks here.
JPMorgan JPM: The stock has gained 35.6% so far this year. The Zacks Consensus Estimate for current-year earnings has been revised 2.2% upward over the past 60 days.
Price and Consensus: JPM
Citigroup C: The stock has surged 42.6% year to date. The consensus estimate for current-year earnings has been revised 1.4% upward over the past 60 days.
Price and Consensus: C
PNC Financial PNC: The consensus estimate for the bank’s earnings for the current year has moved 1.2% higher over the past 60 days. The stock has gained 29.4% so far this year.
Price and Consensus: PNC