It’s quite a task luring investors toward the banking space, which has been tainted by the recent disruptions at Deutsche Bank AG (DB - Analyst Report) and Wells Fargo & Co (WFC - Analyst Report) . The obscurities associated with the rate hike don’t bode well for banks either.
Investors have taken away $6 billion from banking ETFs this year. The broader Financial Select Sector (XLF) has also seen three straight quarters of withdrawals, the longest stretch since the Bull Run began. Despite such pessimism, certain banking stocks have shown an upward trending price over a considerable period of time. At the same time, such stocks are fundamentally solid and are resistant to gyrations in the financial market.
Hence, if you have a penchant for banking shares, take a long position in such stocks. But, before we select such super banks, let us look at what’s plaguing the industry:
Deutsche Bank Woes
Concerns about Deutsche Bank’s liquidity rattled investors’ sentiment. The German lender endured questions like whether it will be able to withstand the cost of any settlement with the U.S. Department of Justice. The bank needs to settle civil claims, which are related to the sale of structured mortgage bonds during the 2008-2009 financial crisis. German Chancellor Angela Merkel had already refused to offer state aid to the giant lender.
According to a Bloomberg report, handful of hedge funds that clear derivatives through the bank had already withdrawn excess cash and positions, while back in June, the International Monetary Fund had described Deutsche Bank as the greatest threat to the global financial system. In fact, the German lender plunged more than 40% this year as investors remain worried about the institution’s thin capital cushion (read more: Forget Deutsche Bank, Buy These 3 Foreign Banks Instead).
Wells Fargo Scam
Wells Fargo added to the mistrust after it was accused of creating fake accounts that led to its CEO John Stumpf’s resignation. The bank was accused of cross-selling, in which it created around 2 million unauthorized customer accounts to achieve its sales goal.
In fact, cross-selling have become a common thing for the entire banking system. Federal regulators and policymakers opine that Wells Fargo is not the only bank which is engaged in cross-selling (read more: Is Wells Fargo Scam an Indication of Major Banking Chaos?).
When it comes to deceitful practices, Massachusetts’ finance regulator has also charged Morgan Stanley (MS - Analyst Report) for being “dishonest and unethical” that put pressure on brokers to sell loans to their clients (read more: Morgan Stanley Charged for "Unethical" Business Practices).
Fed Minutes: Fails to Confirm Rate Hike
Minutes from the Fed’s September meeting, meantime, showed that policy makers were divided in opinion over the timing of a rate hike. They kept a hike on hold last month despite a “reasonable argument” for an increase. While some officials called for a rate hike “relatively soon”, others wanted to see further progress toward full employment and faster inflation.
Ahead of the release of the minutes, New York Fed President Bill Dudley had said that “slack” in the labor market was a reason that the central bank hasn’t been more aggressive in raising rates. Even though it is widely expected that the Fed will hike rates after the U.S. presidential elections, traders believe there is a mere 9% chance of a hike in the month of November (read more: Fed Holds Off Rate Hike for Now: Top 5 Gainers).
Buy 4 Bank Stocks with Solid Upside Potential
Thanks to the aforementioned factors, banks have been unloved for most of the year. But, this growing pessimism failed to deter certain banking stocks from looking up. Instead, these stocks have shown an upward trend in price over the past three to six month. These stocks not only possess a Zacks Rank #2 (Buy) but also have a Momentum Style Score of ‘A’, which offer the best upside potential in the short term.
As we are into the thick of the earnings season, these stocks have also seen positive earnings estimate revisions in the last two months period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Fifth Third Bancorp (FITB - Analyst Report) offers commercial banking, branch banking, consumer lending and investment advisory services. In the last three and six month periods, Fifth Third soared 10% and 13.4%, respectively. The company also witnessed a rise in estimates from $1.59 per share two months ago to $1.6.
JPMorgan Chase & Co. (JPM - Analyst Report) provides consumer & community banking, corporate & investment banking, commercial banking, and asset management services. In the last three and six month’s period, JPM has surged 7.3% and 9.6%, respectively. The company also witnessed a rise in estimates from $5.61 per share two months ago to $5.64.
Northern Trust Corporation (NTRS - Analyst Report) provides asset servicing, fund administration, asset management, fiduciary, and banking solutions. In the last three and six month periods, Northern Trust gained 5.9% and 3.3%, respectively. The company also witnessed a rise in estimates from $4.21 per share two months ago to $4.23.
State Street Corporation (STT - Analyst Report) , through its subsidiary State Street Bank, provides a range of financial services and products to institutional investors. In the last three and six month periods, STT has gained 25.5% and 15.1%, respectively. The company also witnessed a rise in estimates from $5.02 per share two months ago to $5.06.
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