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5 Top Bank Stocks to Buy Ahead of Q3 Earnings

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In the first half of this year, most banks bore the brunt of a flat yield curve and mounting loan defaults due to the coronavirus pandemic. To top it, the supervisory bodies restricted payment of dividends and share buybacks.
 
But now, banks are set to report third-quarter earnings this week. Net interest income is expected to decline in the third quarter. This is because Fed’s bond-buying initiative pushed down the long-term 10-Year Treasury yield in the said quarter.
 
Furthermore, the Fed kept its benchmark lending rate near zero, and the lower interest rate has certainly impacted banks’ net interest margin. Last month, Brian Moynihan, Bank of America CEO, said that he expects banks’ net interest income in the third quarter to decrease around $700 million.
 
However, not all seems gloomy for banks in the third quarter. Provision for loan loss reserves in the third quarter for major banks, including JP Morgan, Bank of America, Citigroup and Wells Fargo, is expected to decline from the prior quarter, per analysts polled by FactSet.
 
Needless to say, loan defaults and nonpayment are likely to have declined in the third quarter because the economy is widely believed to have done well. According to the Federal Reserve Bank of Atlanta, gross domestic product (GDP) in the United States is expected to increase by 35.2% in the third quarter, suggesting an improvement from a decline of 31.4% in the second quarter. At the same time, both the service as well as manufacturing side of the economy have shown expansion in the July-September quarter (read more: U.S. Service Sector is Up and Running: 5 Must Buys).
 
Borrowings, no doubt, have gone up in the third quarter on unemployment benefits and stimulus payments. Having said that, banks are widely expected to have made the most of the initial public offerings (IPOs) of the third quarter. Thus, even if third-quarter earnings for the Zacks Major Banks industry are expected to drop 37.9% from the same period last year, it’s far better than the 68.4% drop seen in the second quarter (read more: Are Bank Stocks Cheap or Value Traps?).
 

5 Must-Own Bank Stocks Heading Into Q3 Earnings

It’s crystal clear that banks’ earnings are going to be encouraging for the third quarter, at least when compared to the prior quarter. This calls for betting on bank stocks that are positioned to see an improvement in third-quarter earnings. In order to pick such stocks, we have chosen those 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.
 
Civista Bancshares, Inc. (CIVB - Free Report) is involved in the business of community banking, through its subsidiaries. The company is expected to report earnings results for the quarter ending September 2020 on Oct 23. Civista Bancshares has an Earnings ESP of +26.31%. The company’s shares have already gained 17.5% over the past five-year period. The stock has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 
First Financial Bancorp. (FFBC - Free Report) is a financial holding company that engages in the business of commercial banking, and other permissible activities that are financial in nature. The company is expected to report earnings results for the quarter ending September 2020 on Oct 22. First Financial Bancorp has an Earnings ESP of +3.36%. The company’s shares have already gained 12.9% over the past five-year period. The stock has a Zacks Rank #2.
 
Independent Bank Corporation (IBCP - Free Report) is a bank holding company. Its subsidiary banks principally serve rural and suburban communities across Michigan's Lower Peninsula. The company is expected to report earnings results for the quarter ending September 2020 on Oct 27. Independent Bank has an Earnings ESP of +2.62%. The company’s shares have gained 17.4% over the past five years. The stock has a Zacks Rank #2.
 
Meridian Bank (MRBK - Free Report) offers deposit accounts, credit products, real estate financing, residential mortgages, investment and wealth management and electronic payments processing services. The company is expected to report earnings results for the quarter ending September 2020 on Oct 22. Meridian Bank has an Earnings ESP of +20.57%. The company’s expected earnings growth rate for the current year is 60.1%. The stock has a Zacks Rank #1.
 
The Bancorp, Inc. (TBBK - Free Report) is a Delaware-chartered, federally insured commercial bank which focuses on service to small and mid-size businesses. The company is expected to report earnings results for the quarter ending September 2020 on Oct 22. Meridian Bank has an Earnings ESP of +5.41%. The company’s expected earnings growth rate for the current year is 23.6%. Its shares have already gained 21.2% over the past five-year period. The stock has a Zacks Rank #2.
 
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