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3 Promising Bank Stocks as Recession Threat Looms in 2023
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Heading into 2023, the questions that come to our mind are whether the inflation will cool down enough for the central banks to stop raising rates and whether there will be an economic slowdown. Per a poll conducted by Reuters, economists are expecting “a short and shallow recession over the coming year.”
This situation will be like a double-edged sword for the banking industry. While a higher interest rate regime (the Federal Reserve is projecting at least another 75 basis points of rate hike, peaking at 5.1% by the end of 2023) will continue to support net interest income (NII), an economic slowdown/recession will lead to gradual weakening of loan demand. If you thought that 2022 was tough for banks, 2023 will bring more challenges.
In the year-to-date period, the S&P Banks Select Industry Index has declined 19%, while the KBW Nasdaq Bank Index is down 26.8%. Almost all banks have lost value this year, making their shares all the more attractive. But you must be careful while selecting bank stocks for your portfolio so that you don’t fall into the value trap. So, we have picked three banks — First BanCorp. (FBP - Free Report) , Fulton Financial Corporation (FULT - Free Report) and First Citizens BancShares, Inc. (FCNCA - Free Report) — that have solid prospects for 2023 despite the headwinds.
Turbulent 2022: A Short Review
The year started on a positive note, with the Fed ending the low-interest rate environment (at present, the benchmark interest rates are at a 15-year high range of 4.25-4.50%) to control persistent inflation. After two years of COVID-related mayhem and ambiguity, the lending scenario improved markedly as the economy opened up. This, along with initiatives taken to support fee income, majorly supported banks’ top line.
But as the year progressed, several macroeconomic and geopolitical matters, including global supply-chain disruptions, rising COVID cases in many nations and the ongoing Russia-Ukraine conflict, dampened investors’ confidence. Also, as inflation turned out to be more “sticky” than expected, the Fed was forced to take unprecedented measures to tackle the same.
Driven by rising interest rates and robust “broad-based” loan growth, the FDIC-insured banks posted a solid 16.5% year-over-year increase in NII for the first three quarters of 2022. As the operating backdrop turned tough, growth in non-interest income was modest. Further, with the economic outlook deteriorating, banks started building reserves to tide over a probable rise in delinquencies. For the first nine months of the year, the provision for credit losses was $30.9 billion against a provision benefit of $30.4 billion in the corresponding period last year.
As you can see, the situation is gradually turning grim for banks. The reserve built has been adversely impacting banks’ bottom-line performance. The FDIC-insured banks recorded a 9.4% year-over-year decline in net income in the first three quarters of 2022.
While we will have to wait till mid-January 2023 to get the actual fourth-quarter and full-year 2022 picture as bank earnings start, the situation is likely to have turned more challenging.
3 Bank Stocks Worth Betting on for 2023
As you can see, the operating environment will not be ideal for banks in 2023, making it difficult to select stocks for solid returns. So, we have taken the help of the Zacks Stock Screener to shortlist the abovementioned stocks. These stocks currently have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Further, these banks have a market cap of $2 billion or more and are expected to witness earnings growth in both 2022 and 2023. Also, these stocks have a Value Score of A or B. Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
First BanCorp: San Juan, PR-based First BanCorp provides various financial services for retail, commercial, and institutional clients. FBP operates more than 60 branches in Puerto Rico, approximately eight branches in the U.S. Virgin Islands and British Virgin Islands, and almost 10 branches in the state of Florida.
First BanCorp’s asset-sensitive position will benefit largely from the rising rate environment. Its strong lending pipeline and strategic asset growth are expected to contribute to NII improvement.
FBP, with a market cap of $2.4 billion, has lost 6.9% so far this year. The company’s earnings are projected to witness a year-over-year rise of 15.7% for 2022 and 9.9% for 2023. The company currently has a Value Score of A.
Fulton Financial: Headquartered in Lancaster, PA, Fulton Financial is a multi-bank financial holding company that provides banking and financial services to businesses and consumers. FULT operates through nearly 200 financial centers across Pennsylvania, New Jersey, Maryland, Delaware and Virginia.
Driven by a solid balance sheet position, Fulton Financial is expected to continue pursuing acquisitions. In July 2022, it acquired Prudential Bancorp, Inc., which will be accretive to earnings in the upcoming period. This, along with rising interest rates, efforts to bolster fee income and decent loan demand, will continue to support financials.
The bank has a market cap of $2.9 billion. FULT’s earnings for 2022 and 2023 are projected to witness a rise of 10.5% and 7.1%, respectively. So far this year, the stock has gained 0.5%. The stock has a Value Score of B.
First Citizens: Headquartered in Raleigh, NC, First Citizens is a Delaware financial holding company, with more than $100 billion in assets and roughly 550 branches in 22 states. In January 2022, First Citizens and CIT Group Inc. merged, leading to the formation of one of the top 20 U.S. financial institutions.
Given the synergies from the CIT Group deal, rising interest rates and improvement in demand for loans, First Citizens’ top line is expected to continue improving in the quarters ahead. Further, the company has a robust liquidity position.
Shares of FCNCA, which has a market cap of $10.8 billion, have lost 9.4% in the year-to-date period. For 2022, the company’s earnings are projected to witness a year-over-year surge of 47.3%. For 2023, earnings are expected to jump 23.4%. The stock has a Value Score of B.
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3 Promising Bank Stocks as Recession Threat Looms in 2023
Heading into 2023, the questions that come to our mind are whether the inflation will cool down enough for the central banks to stop raising rates and whether there will be an economic slowdown. Per a poll conducted by Reuters, economists are expecting “a short and shallow recession over the coming year.”
This situation will be like a double-edged sword for the banking industry. While a higher interest rate regime (the Federal Reserve is projecting at least another 75 basis points of rate hike, peaking at 5.1% by the end of 2023) will continue to support net interest income (NII), an economic slowdown/recession will lead to gradual weakening of loan demand. If you thought that 2022 was tough for banks, 2023 will bring more challenges.
In the year-to-date period, the S&P Banks Select Industry Index has declined 19%, while the KBW Nasdaq Bank Index is down 26.8%. Almost all banks have lost value this year, making their shares all the more attractive. But you must be careful while selecting bank stocks for your portfolio so that you don’t fall into the value trap. So, we have picked three banks — First BanCorp. (FBP - Free Report) , Fulton Financial Corporation (FULT - Free Report) and First Citizens BancShares, Inc. (FCNCA - Free Report) — that have solid prospects for 2023 despite the headwinds.
Turbulent 2022: A Short Review
The year started on a positive note, with the Fed ending the low-interest rate environment (at present, the benchmark interest rates are at a 15-year high range of 4.25-4.50%) to control persistent inflation. After two years of COVID-related mayhem and ambiguity, the lending scenario improved markedly as the economy opened up. This, along with initiatives taken to support fee income, majorly supported banks’ top line.
But as the year progressed, several macroeconomic and geopolitical matters, including global supply-chain disruptions, rising COVID cases in many nations and the ongoing Russia-Ukraine conflict, dampened investors’ confidence. Also, as inflation turned out to be more “sticky” than expected, the Fed was forced to take unprecedented measures to tackle the same.
Driven by rising interest rates and robust “broad-based” loan growth, the FDIC-insured banks posted a solid 16.5% year-over-year increase in NII for the first three quarters of 2022. As the operating backdrop turned tough, growth in non-interest income was modest. Further, with the economic outlook deteriorating, banks started building reserves to tide over a probable rise in delinquencies. For the first nine months of the year, the provision for credit losses was $30.9 billion against a provision benefit of $30.4 billion in the corresponding period last year.
As you can see, the situation is gradually turning grim for banks. The reserve built has been adversely impacting banks’ bottom-line performance. The FDIC-insured banks recorded a 9.4% year-over-year decline in net income in the first three quarters of 2022.
While we will have to wait till mid-January 2023 to get the actual fourth-quarter and full-year 2022 picture as bank earnings start, the situation is likely to have turned more challenging.
3 Bank Stocks Worth Betting on for 2023
As you can see, the operating environment will not be ideal for banks in 2023, making it difficult to select stocks for solid returns. So, we have taken the help of the Zacks Stock Screener to shortlist the abovementioned stocks. These stocks currently have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Further, these banks have a market cap of $2 billion or more and are expected to witness earnings growth in both 2022 and 2023. Also, these stocks have a Value Score of A or B. Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
First BanCorp: San Juan, PR-based First BanCorp provides various financial services for retail, commercial, and institutional clients. FBP operates more than 60 branches in Puerto Rico, approximately eight branches in the U.S. Virgin Islands and British Virgin Islands, and almost 10 branches in the state of Florida.
First BanCorp’s asset-sensitive position will benefit largely from the rising rate environment. Its strong lending pipeline and strategic asset growth are expected to contribute to NII improvement.
FBP, with a market cap of $2.4 billion, has lost 6.9% so far this year. The company’s earnings are projected to witness a year-over-year rise of 15.7% for 2022 and 9.9% for 2023. The company currently has a Value Score of A.
Fulton Financial: Headquartered in Lancaster, PA, Fulton Financial is a multi-bank financial holding company that provides banking and financial services to businesses and consumers. FULT operates through nearly 200 financial centers across Pennsylvania, New Jersey, Maryland, Delaware and Virginia.
Driven by a solid balance sheet position, Fulton Financial is expected to continue pursuing acquisitions. In July 2022, it acquired Prudential Bancorp, Inc., which will be accretive to earnings in the upcoming period. This, along with rising interest rates, efforts to bolster fee income and decent loan demand, will continue to support financials.
The bank has a market cap of $2.9 billion. FULT’s earnings for 2022 and 2023 are projected to witness a rise of 10.5% and 7.1%, respectively. So far this year, the stock has gained 0.5%. The stock has a Value Score of B.
First Citizens: Headquartered in Raleigh, NC, First Citizens is a Delaware financial holding company, with more than $100 billion in assets and roughly 550 branches in 22 states. In January 2022, First Citizens and CIT Group Inc. merged, leading to the formation of one of the top 20 U.S. financial institutions.
Given the synergies from the CIT Group deal, rising interest rates and improvement in demand for loans, First Citizens’ top line is expected to continue improving in the quarters ahead. Further, the company has a robust liquidity position.
Shares of FCNCA, which has a market cap of $10.8 billion, have lost 9.4% in the year-to-date period. For 2022, the company’s earnings are projected to witness a year-over-year surge of 47.3%. For 2023, earnings are expected to jump 23.4%. The stock has a Value Score of B.