Big banks are set to announce second-quarter results next week. The results will show the impact of the coronavirus outbreak on the lenders, making the slate of releases the most interesting in a while now.
Wall Street was initially bracing for a one or two quarter-point rate cuts for the year. However, the pandemic compelled the Fed to trim rates by 150 basis points to near zero in order to keep pumping cash into the financial system and help banks provide more loans to businesses and households.
But the sharp decline in interest rates may have had a negative impact on net interest margins in the second-quarter. Needless to say, a bank’s profit margin depends on its net interest income or the difference between the rates they charge as long-term loans and the rate they pay for short-term borrowings.
Meanwhile, with the Fed trimming rates, long-term mortgage rates have declined, triggering homeowners to refinance their mortgages at low interest rates. Such an increase in applications bodes well for banks’ second-quarter releases.
Coming back to the pandemic, the bigger problem in the second quarter was demand contraction due to widespread travel restrictions, supply shortages and deferred discretionary spending. Companies within this bracket mostly include airlines, lodging and cruise operators. Meanwhile, carmakers, electronic goods makers and chemical companies also remain vulnerable to supply chain interruptions. And these companies owe a lot to creditors, which surely made banks more susceptible to risks in the said quarter.
However, the Fed’s stress test results showed that banks are capable of withstanding the crisis and are “sufficiently capitalized.” They have already set aside billions of dollars to cover the wave of loan defaults. In fact, at the end of the second quarter, banks were still early in the non-performing loan cycle. Moreover, many businesses were able to avoid loan defaults in the second quarter by participating in the Paycheck Protection Program, which will reflect on net interest income.
The unemployment benefits provided by the government may also to some extent reduce consumer debt at least. The CARES Act, with its extra $600 per week in unemployment benefits, did reduce credit card defaults, while ensuring steady flow of rents to landlords. Notably, bank’s loan forbearances and deferred payments due to the pandemic have stretched the credit cycle beyond the second quarter. So, the impact of defaults, if any, won’t get much reflected on second-quarter results.
The second quarter, in the meanwhile, is expected to report another quarter of high trading revenues for banks. Daniel Pinto, JPMorgan Chase’s (JPM) head of corporate and investment banking, said that the second-quarter trading revenues are projected to grow 50% from the year-ago quarter.
5 Bank Stocks to Buy Ahead of Q2 Earnings
The aforesaid factors are sure to have worked in favor of a few banks in the second quarter. This calls for investing in banks which are expected to report a significant uptick in second-quarter earnings. Here we have picked such stocks with a positive Earnings ESP
— our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. At the same time, these stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
State Street Corporation
(STT - Free Report
) primarily operates through its principal banking subsidiary, State Street Bank. The Zacks Rank #2 company is expected to report earnings results for the quarter ending June 2020 on Jul 17. State Street has an Earnings ESP of +7.34%. The company’s expected earnings growth rate for the next five-year period is 9.1%.
Civista Bancshares, Inc.
(CIVB - Free Report
) is involved in the business of community banking through its subsidiaries. The Zacks Rank #2 company is expected to report earnings results for the quarter ending June 2020 on Jul 24. Civista Bancshares has an Earnings ESP of +29.83%. The company’s shares have risen 17.5% over the past five years.
ST Bancorp, Inc
. (STBA - Free Report
) is engaged in general banking business. The bank is a full-service one with its main office in Indiana, PA. The Zacks Rank #2 company is expected to report earnings results for the quarter ending June 2020 on Jul 30. ST Bancorp has an Earnings ESP of +78.18%. The company’s expected earnings growth rate for the next year is 16%.
Summit Financial Group, Inc
. (SMMF - Free Report
) provides community banking and other financial services to individuals and businesses, primarily in the Eastern Panhandle, Southern and North Central regions of West Virginia. The Zacks Rank #2 company is expected to report earnings results for the quarter ending June 2020 on Jul 23. Summit Financial has an Earnings ESP of +92.59%. The company’s expected earnings growth rate for the next year is 20.4%.
(PFBC - Free Report
) is one of the largest independent commercial banks in California, focusing on the China-America market. The Zacks Rank #1 company is expected to report earnings results for the quarter ending June 2020 on Jul 15. Preferred Bank has an Earnings ESP of +13.64%. The company’s shares have rallied 23.7% over the past five years.
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