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U.S. Banks Earn Record Profit in Q2: 5 Top-Ranked Picks

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The first half of 2018 has turned out to be highly profitable for the U.S. banking sector. In the second quarter of 2018, total profit of the banks topped prior record set in the preceding quarter. Moreover, U.S. banks are set to benefit significantly from expected hike in interest rate by the Fed in September.

At this stage, it will be a prudent move to invest in bank stocks with favorable Zacks Rank and strong growth potential.

Banks Earn Record Profit in Q2

According to the Federal Deposit Insurance Corporation, American banks booked a record high profit of $60.2 billion in the second quarter of 2018, improving 25% year over year. This figure also surpassed the previous profit record of $56 billion (up 28% year over year) set in the first quarter of 2018.

American Bankers Association claimed that strong lending by the U.S. banks was the primary catalyst. However, massive cut in corporate tax rate and deregulation policies implemented by the Trump administration along with robust economic fundamentals of the U.S. economy also helped the banking sector to flourish in 2018.

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 Gain From Higher Interest Rate

On Aug 22, in the minutes of the Federal Reserve's meeting earlier this month, the central bank has indicated widespread support for another interest rate increase in September. So far this year, the Fed raised interest rate twice. Many central bankers have opined for two more rate hikes in the rest of 2018.

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.

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 a Zacks Rank #1 (Strong Buy) and solid growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

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

Blue Hills Bancorp Inc. is the holding company for Blue Hills Bank, a full service, community bank. It provides consumer and commercial deposit and loan products. The company has expected earnings growth of 78.6% for current year. The Zacks Consensus Estimate for the current year has improved by 8.7% over the last 30 days.

Northrim BanCorp Inc. (NRIM - Free Report) is a full-service commercial bank that provides a full range of personal and business banking services. The company has expected earnings growth of 39.7% for current year. The Zacks Consensus Estimate for the current year has improved by 15.4% over the last 30 days.

Popular Inc. (BPOP - Free Report) is a diversified, publicly owned bank holding company primarily operating in Puerto Rico, U.S. Virgin Islands, the British Virgin Islands, and New York. The company has expected earnings growth of 75.4% for current year. The Zacks Consensus Estimate for the current year has improved by 4.2% over the last 30 days.

The First Bancshares Inc. (FBMS - Free Report) operates as the holding company for The First, A National Banking Association that provides general commercial and retail banking services. The company has expected earnings growth of 27.8% for current year. The Zacks Consensus Estimate for the current year has improved by 4.7% over the last 30 days.

BayCom Corp. (BCML - Free Report) provides commercial banking products and services to businesses and individuals. The company has expected earnings growth of 22.4% for current year. The Zacks Consensus Estimate for the current year has improved by 9.4% over the last 30 days.

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