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5 Top Bank Stocks to Buy Ahead of Q3 Earnings

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Banks might lose steam in Q3, thanks to a slowdown in loan growth and a relatively quiet quarter for the trading division.

However, we shouldn’t forget that a higher interest rate environment works in favor of banks. On that note, let’s take a look at banks that are likely to make the most of the Q3 earnings season.

Bank Stocks Continue to Lag Broader Market

Big banks will be kicking off the earning season this week, with JPMorgan (JPM - Free Report) , Wells Fargo (WFC - Free Report) and Citigroup (C - Free Report) set to report on Oct 12. So far this year, banks have underperformed the broader S&P 500. Big banks have lost 8.1%, compared with the broader market’s gain of 4.6%. Big banks did manage to outperform the broader market at the start of this year, but the scene changed around mid-May.

 

So, the obvious question is that why are banks underperforming? The answer can be found in the monthly fund manager survey by Bank of America Merrill Lynch. Banks have remained a popular trade in the last 10 years. We have often seen that popular trades underperform the broader market as investors have already taken a long position and there is little in the way of new funds that will push prices higher.

Some investors also think that banks have seen the top of the growth cycle, which might affect earnings. Loan growth remained subdued, as shown in Federal Reserve data. Non-banking players such as private-equity firms and insurers are giving banks tough competition at the loan segment. And net interest margins (NIM) were kept in check as LIBOR rates increased less than anticipated, while trading revenues slowed down. For the bank’s trading desk, summer has always been a tough time, as has been the case this year.

Do We Expect Lackluster Q3 Earnings for Banks?

Downward revisions to loan growth and NIM outlooks coupled with softer trading revenues don’t bode well for banks in Q3. However, a rising rate environment and growing economy offer some respite.

The Fed has already hiked interest rates for the third time this year. Rates are now at the highest levels since October 2008, just after the collapse of Lehman Brothers (read more: 5 Bank Stocks That Made the Most Since Lehman's Collapse).

Looking ahead to next year, four Fed officials expect two rate hikes; four officials anticipate three and four officials see four hikes. For 2020, almost all officials predict one more rate hike. Policymakers are expected to raise rates gradually as they expect the economy to grow at a steady pace and inflation to remain stable and anchored.

Needless to say, higher interest rates boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

5 Bank Stocks to Buy Ahead of Q3

We have, thus, selected five bank stocks that are expected to make the most of a rising rate environment and report a significant uptick in Q3 earnings. These stocks have a positive Earnings ESP. This is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. These stocks, in the meanwhile, also flaunt a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

M&T Bank Corporation (MTB - Free Report) provides retail and commercial banking services. The Zacks Consensus Estimate for its current-year earnings rose 0.2% in the last 60 days. The company’s expected earnings growth rate for the current year is 37.7% compared with the Banks - Major Regional industry’s estimated rise of 27%. The company is expected to report earnings results for the quarter ending September 2018 on Oct 17. M&T Bank has an Earnings ESP of +0.75%.

First Midwest Bancorp, Inc. (FMBI - Free Report) operates as a bank holding company for First Midwest Bank. The Zacks Consensus Estimate for its current-year earnings rose 3.7% in the last 90 days. The company’s expected earnings growth rate for the current year is 40.3% compared with the Banks - Midwest industry’s projected rise of 29.4%. The company is expected to report earnings results for the quarter ending September 2018 on Oct 23. First Midwest has an Earnings ESP of +0.36%.

First Mid-Illinois Bancshares, Inc. (FMBH - Free Report) provides community banking products and services. The Zacks Consensus Estimate for its current-year earnings rose 0.7% in the last 60 days. The company’s expected earnings growth rate for the current year is 25.5% compared with the Banks - Northeast industry’s expected growth of 21.8%. The company is likely to report earnings results for the quarter ending September 2018 on Oct 25. First Mid-Illinois has an Earnings ESP of +0.99%.

Horizon Bancorp, Inc. (HBNC - Free Report) provides commercial and retail banking services. The Zacks Consensus Estimate for its current-year earnings rose 0.7% in the last 60 days. The company’s expected earnings growth rate for the current year is 44.1% compared with the Banks - Northeast industry’s estimated rise of 21.8%. The company is expected to report earnings results for the quarter ending September 2018 on Oct 24. Horizon Bancorp has an Earnings ESP of +0.88%.

First Bancorp (FBNC - Free Report) provides banking products and services for individuals and small to medium-sized businesses. The Zacks Consensus Estimate for its current-year earnings rose 1.3% in the last 60 days. The company’s expected earnings growth rate for the current year is 63.2% compared with the Banks - Southeast industry’s projected rise of 31.4%. The company is expected to report earnings results for the quarter ending September 2018 on Oct 23. First Bancorp has an Earnings ESP of +2.21%.

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