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Bank Stocks Surge as Trade War Fears Dissipate: 5 Top Picks

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On Jul 9, the banking stocks rallied as investors shrugged off trade war fears driven by robust economic data. Latest job market data alleviates the concern regarding the United States being in the late stage of economic expansion. This news was like a bout of fresh air for market participants.

On Jul 9, the SPDR S&P Bank ETF (KBE) was up 2.3%, its best single day gain after Mar 26. Moreover, KBW Nasdaq Bank Index (BKX) was up 1.8% in last five trading days. At this stage, it will be a prudent move to invest in bank stocks with favorable Zacks Rank.

Banks to Gain From Higher Interest Rate

On Jul 9, banking stocks also gained from rising yield on benchmark 10-year Treasury Notes. The yield increased 3.6 basis points to 2.87%. Moreover, the Fed has decided to pursue a steady state rate hike policy to stabilize the economy.

A hike in interest rate will raise cost of funds which in turn will enable banks to increase the spread between longer-term assets, such as loans, with shorter-term liabilities, consequently bolstering the industry’s profits.

Bank Fees Jump Record High on Strong M&A Activities

According to Freeman Consulting Services, U.S. banks have achieved a milestone in the first half of 2018 after earning $8.1 billion of fees from $1.45 trillion of syndicated lending to companies for mergers and acquisitions (M&A), leveraged buyouts, dividends and refinancing. Previous record was of $8 billion earned in the second half of 2017.

Banks earned $1.5 billion of fees from lending to high-quality companies, up 44% year over year and another $6.6 billion fees from lending to lower-rated companies, up 14% year over year. The total US investment banking fee (from equity and bond underwriting and M&A advisory and the syndicated loan arrangement fees) surged $26.7 billion in the first half of 2018.

Banks to Raise Dividend Rate and Share Buyback

On Jun 28, the Fed conducted the second and final leg of the annual stress-test exercise, known as Comprehensive Capital Analysis and Review (CCAR). The central bank gave clearance to 32 of the 35 biggest banks in the United States that hold 80% of the total assets in the U.S. financial system, to raise their dividends and buy back shares.

Most of the major U.S. banks announced their dividend payout and share buyback plans following results of the final round of stress test were announced. The big banks are expected to pay $170 billion in combined dividends for the coming four quarters. This is nearly $30 billion more than in the previous 12 months. (Read More: Winners & Losers From Fed's Second Round Stress Test Results)

Our Top Picks

Strong earnings, massive tax cuts and solid economic data are likely to boost consumer spending in the coming months driving the price level up. This may prompt the Fed to aggressively implement tight monetary policy. Higher interest rate will eventually aid the banking industry. Consequently, banking stock stocks are lucrative investment options at the moment.

We narrowed down our choice to five banking stocks with either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and solid growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart shows price performance of our five picks in the last three months.

 

First Financial Northwest Inc. (FFNW - Free Report) serves the Puget Sound Region of Washington that includes King, Snohomish and Pierce Counties, through its full-service banking office. The company sports a Zacks Rank #1. First Financial Northwest has expected earnings growth of 77.5% for current year. The Zacks Consensus Estimate for the current year has improved by 21.5% over the last 60 days.

CapStar Financial Holdings Inc. (CSTR - Free Report) offers banking products and services which include savings accounts, debit and credit cards, personal and business loans, mortgages, line of credit, wealth management and online banking. The company sports a Zacks Rank #1. CapStar Financial Holdings has expected earnings growth of 187.5% for current year. The Zacks Consensus Estimate for the current year has improved by 2.7% over the last 60 days.

Merchants Bancorp (MBIN - Free Report) provides multi-family housing and health care facility financing, mortgage warehousing, retail and correspondent residential mortgage banking, agricultural lending and traditional community banking services. The company carries a Zacks Rank #2. Merchants Bancorp has expected earnings growth of 12.7% for current year. The Zacks Consensus Estimate for the current year has improved by 3.7% over the last 60 days.

Bay Banks of Virginia Inc. (BAYK - Free Report) provides individual and commercial customers with a full range of services, including commercial and consumer deposit accounts and loans, credit cards, automated teller machines and other traditional banking services. The company carries a Zacks Rank #2. Bay Banks of Virginia has expected earnings growth of 275% for current year. The Zacks Consensus Estimate for the current year has improved by 7.1% over the last 60 days.

Lakeland Financial Corp. (LKFN - Free Report) is a leading bank holding company engaged in general banking business. The company carries a Zacks Rank #2. Lakeland Financial has expected earnings growth of 25.5% for current year. The Zacks Consensus Estimate for the current year has improved by 1% over the last 60 days.

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