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Plenty of Upside Left in Bank Stocks: 4 Picks for 2018

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Slump in trading and mortgage activities hurt banks’ revenues to quite an extent in 2017, but gradual improvement in the rate environment helped them witness a rise in net interest margins, which drove earnings.

In fact, with the overall improvement in the U.S. economy and growing investor optimism about reduced regulations, the banking industry has emerged as one of the best performers in 2017.

While the first few months were not that great, the KBW Nasdaq Bank Index has gained nearly 17.3% so far this year.

This rally is expected to continue in 2018 and we believe that there is plenty of upside left in bank stocks based on the below mentioned factors:

Firstly, if the Fed sticks to its plan of increasing rates three times in 2018, it will further help in expanding banks’ margins, which will ultimately drive revenue growth.

Secondly, while all sectors are likely to benefit from the passage of the tax reform bill, which reduces corporate tax rates from 35%to 21%, bank are expected to gain the most because they are amongst the highest tax payers in the United States.

Also, driven by the tax legislation provisions related to repatriation of overseas cash, banks will be in a win-win situation. This is because, as overseas cash is brought back, it is expected to provide an impetus to M&As activities, thereby giving a boost to investment banking. Moreover, as the bill will lower tax rates on wealthy individuals, asset management units of banks are expected to witness a rise in money available for investment.

Further, as the tax bill spurs economic improvement, it will lead to a rise in lending activities and higher interest rates. These will benefit banks.

Thirdly, growing investor optimism about reduced regulations is likely to give a boost to banking stocks in 2018. The announcement of a bipartisan agreement has already helped investors regain confidence. Once there is a reduction in the number of banks tagged as systemically important financial institutions (SIFI), the compliance costs for those banks that are removed from the group will be reduced. Thus, this is expected to aid bottom-line growth and will ultimately drive the prices of their stocks higher.

Since the entire banking industry is likely to benefit from these factors, it is not an easy task to find the best picks.

Hence, we have taken the help of the Zacks Stock Screener to shortlist stocks that have market capitalization of  more than $1 billion and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

To further cut short the list, we have selected those stocks that have projected earnings per share (EPS) growth of more than 5% for 2018 and have a Value Score of B.

The Value Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of A or B, when combined with Zacks Rank #1 or 2, offer the best upside potential.

Notably, the selected stocks have witnessed positive earnings estimate revisions for 2018 over the past 60 days.

Hancock Holding Company , based in Gulfport, MS, has a market cap of $4.14 billion and a projected EPS growth rate of 21.9% for 2018. The stock carries a Zacks Rank of 2.

(Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)

Old National Bancorp (ONB - Free Report) also has a Zacks Rank of 2 and a market cap of $2.35 billion. The company is based in Evansville, IN and has a projected EPS growth rate of 23.3% for the next year.

First Interstate BancSystem, Inc. (FIBK - Free Report) , headquartered in Billings, MT, has a market cap of $2.19 billion. The stock carries a Zacks Rank #2 and has a projected EPS growth rate of 12.5% for 2018.

Heartland Financial USA, Inc. (HTLF - Free Report) , headquartered in Dubuque, IA, has a market cap of $1.53 billion. The stock carries a Zacks Rank #2 and its projected EPS growth is 15.9%.

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