Some of the major banks that have reported third-quarter 2020 results so far have witnessed a support from fee income sources, which aided their earnings to an extent. This, along with comparatively smaller reserve build, indicates that banks are showing resilience amid near-zero interest rates and economic slowdown.
Bank stocks are always in the spotlight as their financial performance is considered as one of the barometers of nation’s economy. While business activities gradually resumed during the third quarter, demand for loan remained soft.
Thus, because of muted loan growth along with low interest rates, banks’ interest income and net interest margins (one of the key metrics for gauging profitability) are expected to have been adversely impacted to a large extent.
Now coming to fee income sources, let’s begin with trading revenues. Similar to the first half of the year, the third quarter saw significant market volatility along with higher client activity. Hence, banks’ trading revenues are expected to have improved, thereby, aiding top-line growth.
Growth in mortgage originations was decent in the third quarter, while refinancing activities continued to show a significant rise, mainly due to historically low mortgage rates. Thus, this is expected to have supported banks’ mortgage banking businesses.
Additionally, given the near-zero interest rates and the Federal Reserve’s bond purchase program, bond issuance volumes were solid in the quarter as companies took this as an opportunity to bolster their balance sheets. Further, IPO activities bounced back and as companies continued to build liquidity to tide over the pandemic-induced crisis, there was a rise in follow-up equity issuances. These are likely to have aided underwriting revenues in the to-be-reported quarter.
Though deal making rebounded in the third quarter, it was not as robust as in the prior-year quarter. So, advisory revenues are not likely to have offered much support to banks’ revenues this time as well.
On the cost front, with majority of employees working from home, banks are expected to have recorded a fall in overhead expenses in the third quarter. Yet, with the increase in the use of virtual mediums for communication and other business activities, technology costs are expected to have risen to some extent. Overall, costs are expected to have been manageable.
Q3 Earnings Expectations
The Zacks Major Banks industry’s earnings are projected to decline 37.9% year over year in the third quarter. This is compares favorably with 68.4% fall recorded in second-quarter 2020.
Likewise, earnings for Banks & Thrifts are expected to decrease 25.6% compared with 60% plunge witnessed in the prior quarter.
(For a detailed look at the earnings growth projections for this sector and others, please read our Earnings Preview article.)
Picking Potential Winners
Despite not so impressive outlook for the banking sector, we have selected some banking stocks that are well positioned to beat earnings estimates in their upcoming releases.
Choosing stocks with earnings beat potential might be a difficult task unless one knows the process to shortlist. One way to do it is by picking stocks that have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
5 Major Banks Set to Surpass Earnings Estimates
Here are five bank stocks that have the right combination of elements to deliver positive earnings surprises in their upcoming announcements:
The Bank of New York Mellon Corporation (BK - Free Report) has an Earnings ESP of +0.33% and a Zacks Rank of 3. It is slated to report results on Oct 16.
KeyCorp (KEY - Free Report) is set to report third-quarter earnings on Oct 21. The company currently has an Earnings ESP of +1.77% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Earnings ESP for Northern Trust (NTRS - Free Report) is +0.37% and it carries a Zacks Rank of 2 at present. The company is scheduled to release quarterly figures on Oct 21.
Fifth Third Bancorp (FITB - Free Report) is set to report third-quarter earnings on Oct 22. The company currently has an Earnings ESP of +5.90% and a Zacks Rank of 3.
The Earnings ESP for BankUnited, Inc. (BKU - Free Report) is +6.40% and it has a Zacks Rank of 3 at present. The company is set to report quarterly numbers on Oct 28.
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