A steadily growing economy, more confident consumers and record low jobless rate are sure to give banks a lift this Q4 earnings season. These favorable factors will encourage more people to take loans, and with rising interest rates, net interest margins will improve. Reduction in corporate taxes will also boost earnings as banks will be able to retain more of their revenues.
But, the Trump administration’s overhaul of the tax law means that banks will have to re-measure the value of deferred tax assets and liabilities and consider one-time charges for repatriating overseas earnings. Most of the banking behemoths have already announced such one-time charges associated with the accounting changes that will now have to be made.
Nevertheless, let us focus on banks that are likely to make the most of the Q4 earnings season. Such banks are positioned to report upbeat earnings results, which will eventually lead to an uptick in share price.
Loans to Grow
The consumer confidence index is at a historically high level, courtesy of a bullish job market. While the unemployment rate remained at a record low of 4.1%, workers’ pay has increased 2.5% in the December 2016 to December 2017 period, up from 2.4% in the prior month.
The National Employment Law Project, in fact, showed that the minimum wage is poised to increase in 18 states and around 20 cities in the United States. This will reach employee wages closer to $15 an hour, which is known as “living wage.”
All these factors will lend consumers the flexibility to take more debt and also reduce loan default risks, which bode well for banks.
Rising Rates for Borrowers, Not Savers
As widely expected, the Federal Reserve raised interest rates last month. The benchmark lending rate was hiked by a quarter percentage point to a range of 1.25% to 1.5%. In fact, Fed officials expect to hike rates at a steady pace. The median expectation for rate hikes this year is pegged at three — at least two in 2019 and two more in 2020.
A move toward higher rates is a welcome news for banks. Needless to say, ultra-low interest rates have weighed on their margins in the last decade. Then again, higher interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
With the Fed hiking rates by a quarter-point, the biggest banks by assets also said that they will do the same to its main lending rate. Millions of credit card holders and small-business borrowers will have to pay more in terms of interest. But, does that mean there will be higher rates in deposits? Certainly not! Rates for savers will remain unchanged, confirmed JPMorgan Chase & Co. (JPM - Free Report) . Thus, the ability to earn more on assets and limit the cost of liabilities to depositors should keep shareholders of U.S. banks cheerful.
How Will Banks Deal With Tax Reform?
House Republicans passed a monumental bill to enact $1.5 trillion in tax cuts for businesses and individuals. The bill trims the corporate tax rate from 35% to 21%, making it the biggest one-time drop in big business tax rates ever.
Banks face a high tax burden, which makes them big gainers when tax rates go down. As per KBW estimates, JPMorgan Chase, Wells Fargo & Co (WFC - Free Report) and Bank of America Corp (BAC - Free Report) will enjoy a 20% or more hike in profits if the corporate tax rate is cut to around 20%.
But, such tax cuts will result in revaluation in deferred tax assets. This in turn will result in one-off hits to banks’ profits. However, even though it may hamper Q4 earnings, shareholders will be much better off over the long term.
5 Bank Stocks to Buy Heading Into Q4
Barring one-time accounting charges, improving consumer sentiment and rise in interest rates will help banks stay afloat this Q4 earnings season. This calls for investing in five banks, which are expected to report a significant uptick in Q4 earnings.
These stocks have a positive Earnings ESP — our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
BancFirst Corporation (BANF - Free Report) operates as the holding company for BancFirst that provides a range of commercial banking services to retail customers, and small to medium-sized businesses. BancFirst has a Zacks Rank #2. The company is expected to report earnings results for the quarter ending December 2017 on Jan 18, 2018. BancFirst has an Earnings ESP of +1.47%. The company’s expected earnings growth rate for the current year is 23.4%, better than the industry’s expected gain of 13.1%.
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First Bancorp (FBNC - Free Report) operates as the bank holding company for First Bank that provides banking products and services for individuals and small to medium-sized businesses, primarily in North Carolina and northeastern South Carolina. First Bancorp has a Zacks Rank #1. The company is expected to report earnings results for the quarter ending December 2017 on Jan 25, 2018. BancFirst has an Earnings ESP of +6.88%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
The company’s expected earnings growth rate for the current year is 52.6%, way higher than the industry’s expected gain of 6.5%.
First Financial Bancorp (FFBC - Free Report) operates as the bank holding company for First Financial Bank that provides commercial banking and other banking, and banking-related services to individuals and businesses in Ohio, Indiana, and Kentucky. The stock has a Zacks Rank #1. The company is expected to report earnings results for the quarter ending December 2017 on Jan 18, 2018. First Financial has an Earnings ESP of +6.67%. The company’s expected earnings growth rate for the current year is 9.1%, higher than the industry’s expected gain of 7.2%.
Morgan Stanley (MS - Free Report) — a Zacks Rank #2 company — provides various financial products and services to corporations, governments, financial institutions and individuals. The company is expected to report earnings results for the quarter ending December 2017 on Jan 18, 2018. Morgan Stanley has an Earnings ESP of +1.32%. The company’s expected earnings growth rate for the current year is 22.3%, more than the industry’s expected gain of 14.3%.
Green Bancorp, Inc. (GNBC - Free Report) operates as the holding company for Green Bank, N.A. that provides commercial and private banking services primarily in Texas. The stock has a Zacks Rank #2. The company is expected to report earnings results for the quarter ending December 2017 on Jan 25, 2018. Green Bancorp has an Earnings ESP of +2.94%. The company’s expected earnings growth rate for the current year is more than 100%, higher than the industry’s projected gain of 6.5%.
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