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Buy 5 Top Bank Stocks on Surging U.S. Government Bond Yields

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Yields on several government bonds continue to stay at historic high levels throughout October. Yields on U.S. sovereign bonds spiked on Oct 3 and have remained high since then, following the announcement of a series of strong economic data.  

However, a hike in interest rates 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 boosting the sector’s profits. Consequently, investment in banking stocks with a favorable Zacks Rank and strong growth potential will be a prudent move.

Spike in U.S. Government Bond Yields

A growing U.S. economy, which is currently in the 10th year of bull run, along with impressive earnings results have instilled investors’ confidence in riskier assets such as equities and corporate bonds instead of safe-haven government bonds.

The yields on 10-year U.S. Treasury Note (3.232%), 30-year U.S. Treasury Note (3.384%) and 2-year U.S. Treasury Notes (2.912%) are currently hovering around their seven-year, four-year and 10-year highs, respectively.  Additionally, on Oct 3, Fed chair Jerome Powell announced that the country has to go a long way for interest rate to hit neutral, a clear indication of further rate hikes.

Solid Earnings Momentum for Banks in Q3

Major banks have started reported third-quarter earnings results which impressively outpaced our consensus estimate. As of Oct 12, only 4 out of 97 finance companies of the S&P 500 index have reported. Notably, these 4 companies account for 21.5% of the sector’s total market capitalization in the index.

Total earnings for these 4 finance companies are up 16.1% from the same period last year on 3.4% higher revenue. For the quarter as a whole, total Finance sector earnings are expected to be up +31.6% from the same period last year on +3.1% higher revenues. JPMorgan Chase & Co. (JPM - Free Report) , The Goldman Sachs Group Inc. (GS - Free Report) , Citigroup Inc. (C - Free Report) and Morgan Stanley (MS - Free Report) surpassed both earnings per share and revenues estimates. (Read More: Banks Provide Positive Start to Q3 Earnings Season)

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. The 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 and another $6.6 billion fees from lending to lower-rated companies. Total U.S. investment banking fee surged $26.7 billion in the first half of 2018.

Our Top Picks

Strong earnings, massive tax cuts and solid economic data are likely to boost consumer spending in the coming months, which will result in higher economic growth and price level. This will propel interest rates higher. 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 shows price performance of our five picks year to date.

National Bank Holdings Corp. (NBHC - Free Report) operates as the bank holding company for NBH Bank that provides various banking products and financial services to commercial, business, and consumer clients in the United States. The company has expected earnings growth of 69.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.4% over the last 60 days.

CBTX Inc. (CBTX - Free Report) operates as the bank holding company for CommunityBank of Texas National Association that provides commercial banking solutions to small and mid-sized businesses, and professionals in the United States. The company has expected earnings growth of 25.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 8% over the last 60 days.

S&T Bancorp Inc. (STBA - Free Report) is a bank holding company engaged in full service general banking business through a network of 34 branches. The company has expected earnings growth of 19% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.1% over the last 60 days.

SVB Financial Group (SIVB - Free Report) offers a diverse set of banking and financial products and services to clients across the United States primarily in the technology, healthcare, private equity/venture capital and premium wine industries. The company has expected earnings growth of 74.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.8% over the last 60 days.

Orrstown Financial Services Inc. (ORRF - Free Report) is a financial holding company. Its primary activity consists of owning and supervising its subsidiary, Orrstown Bank, which provides banking and bank-related services. The company has expected earnings growth of 39.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.5% over the last 60 days.

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