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Fed Likely to Hike Rate on Job & Wage Surge: 5 Top Bank Picks

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Latest job market data alleviates concerns regarding any sort of economic slowdown in the United States. A significant surge in the hourly wage rate has once again placed inflationary fears on the forefront. Notably, investors are concerned that higher inflationary expectations will lead to the central bank raising interest rates aggressively to stabilize the economy.

However, a hike in interest rate will raise the cost of funds, which in turn will enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus bolstering the sector’s profits. Consequently, investment in banking stocks with a favorable Zacks Rank and strong growth potential will be a prudent move.

Robust Labor Market Leads to a Spike in Wage Rate

On Sep 7, the Labor Department reported that the U.S. economy added 201,000 jobs in August surpassing the consensus estimate of 193,000. Unemployment rate remains at 3.9%, its 18-year low.

Average hourly wage rate increased 0.4% in August, doubling the consensus estimate of a rise of 0.2%. In August, wages grew 2.9% on an annualized basis compared with 2.7% in July, reflecting its highest level since June 2009. As a result of wage hike, the yield on the benchmark two-year U.S. Treasury Note rose 2.707%, its highest level since Jul 30, 2008.

Fear of an Impending Inflation Reignites

On Aug 22, the minutes of the Federal Reserve's meeting indicated widespread support to another interest rate increase in September to cool down the strong U.S. economy with a tight labor market. So far this year, the Fed has raised interest rates twice. Many central bankers have indicated two more rate hikes in the rest of 2018.

On Aug 30, the Bureau of Economic Analysis reported that the 12-month PCE index (personal consumption expenditure index) rose by 0.1% to 2.3% in July, marking its highest level since April 2012. Notably, PCE index is considered as Fed’s preferred measure of inflation. Core PCE index (excluding food and energy items) also reached 2% for the first time since March and only second time since 2012.

Banks Earn Record Profits 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 U.S. banks was the primary catalyst. However, a massive cut in corporate tax rate and government’s 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.

Top Picks

Strong earnings, massive tax cuts and solid economic data are likely to boost consumer spending in the coming months, driving up the price level. This may prompt the Fed to aggressively implement a 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 year to date.

Blue Hills Bancorp Inc. (BHBK - Free Report) 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 60 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 60 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 9% over the last 60 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 60 days.

Bank of Marin Bancorp (BMRC - Free Report) provides a range of financial services primarily to professionals, small and middle-market businesses, individuals, and not-for-profit organizations in California. The company has expected earnings growth of 33.2% for current year. The Zacks Consensus Estimate for the current year has improved by 5.6% over the last 60 days.

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