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Before Q2 Earnings Intensify, Sell These 3 Bank Stocks

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A strong appetite for government bonds has impacted interest rates by driving them lower across the globe.  This is good news for borrowers seeking to take advantage of cheaper financing options.  Lenders, on the other hand, stand to see less profitability from providing loans.  Banks are the biggest lenders in the market, so they stand to see their profits take a beating as more and more investors pile in on bonds and other safe investments. 

There are many lingering worries about the broader market, and Brexit has taken center stage this summer.  Many believed that a British departure from the European Union would never happen, even after votes were tallied up.  Theresa May is the new Prime Minister of the UK, and she has assigned a cabinet that is determined to plan and execute Britain’s leave from the EU.  Brexit looks like it will surely happen, and it will take a few years before the EU departure is official. 

The unpredictable ramifications of Brexit have caused a lot of speculation to brew amongst investors, and as it becomes a reality waiting to take form, it may be wise to expect a low interest rate environment to persist.  Banks are bracing for this possibility, and if a low rate environment does end up prevailing over the next few years, you’ll be better off reducing your portfolio’s exposure to lending stocks.

These 3 banks have yet to report their quarterly earnings results, but momentum has not been going their way as of late.  Their short term earnings outlook has seen pessimism from analysts in the form of negative earnings estimate revisions, and this increases the chance that they will miss earnings expectations when they report their quarterly results.  Lower interest rates stand to affect their lending operations going forward, and this could lead to lower earnings guidance from these firms.

The Bank of New York Mellon Corporation-(BK - Free Report)

The Bank of New York provides comprehensive financial services to individuals, businesses of all sizes, financial institutions, public agencies, and even governments.  Their business lines include Securities Servicing and Global Payment Services, Private Client Services and Asset Management, Corporate Banking, Global Markets, and Retail Banking.  The bank has a market cap of $42.86 billion, and it is a Zacks Rank #4 (Sell).  With a beta of 1.47, BK tends to see more volatile trading compared to the broader market.

The Bank of New York has received several negative earnings estimate revisions over the last 60 days.  Within the last two months, 14 analysts have revised their earnings estimates lower for the current year, and no analysts have pushed their current year earnings forecasts higher.  For the next fiscal year, analysts have unanimously revised their earnings estimates lower over the last month, and this has driven our EPS consensus lower.  Over the last 30 days, the estimate has dropped from EPS of $3.44 to $3.34.  BK is expected to report its quarterly earnings later this week.

KeyCorp-(KEY - Free Report)

KeyCorp is a banking firm that provides investment management, retail and commercial banking, consumer financing, and other services for individual and corporate clients.  KEY stock got downgraded to a Zacks Rank #4 (Sell) over the last week, and it also gets a grade of “F” for growth in our Style Scores.   The company’s sales have been stagnating since 2009, and that will be a hurdle for KEY to address if it wants to see its market cap expand.

KeyCorp has seen a lot of negative revision activity from analysts over the past two months.  Within that time span, analysts have unanimously revised estimates downwards for this year and next year.  9 analysts have negatively revised their EPS estimates on KEY for this year.  One of these revisions were made as recently as seven days ago, and this does not bode well for the company, especially since it expected to release its quarterly results next week.

BankUnited Inc-(BKU - Free Report)

BankUnited and its subsidiaries work in providing financial products and services to its clients in the US.  The bank provides various types of loans such as mortgages and real estate loans, equipment and term loans, and letters of credit.  The company is pretty small, as it has a market cap of just $3.4 billion.  Like KeyCorp, BKU saw its rank move lower over the last week, and it is now a Zacks Rank #4 (Sell). 

BankUnited has a PEG of 3.57, so it may be relatively overvalued compared to its expected growth rate.  The company also gets an “F” for value and momentum in our Style Scores.  Over the last two months, seven analysts have revised their earnings expectations downwards and three revised expectations upwards for the current quarter.  Each of our consensus estimates have trended downwards over the last three months.  There has been a notable decline for our current year consensus estimate, and over the last 30 days it has gone from $2.20 to $2.15.  BKU is expected to release its earnings results later this week.

Bottom Line

These banks are seeing their EPS expectations trend downwards, and they also stand to be hurt by lower interest rates over the longer term.  As long as investors question the health of the broader market, a lot of money will continue to be allocated towards bond investments.  Many companies and industries stand to be negatively impacted by Brexit, but banks with a large lending focus seem poised to be affected greatly before a Brexit even takes place. 

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