Banks’ fourth-quarter earnings outlook is about to get messy with the darkening of the global economic outlook. However, we shouldn’t forget that trading revenues will get a boost from the recent volatility in the equity markets. US government shutdown also won’t be much of a pain for banks, while NIMs are expected to benefit from higher short-term rates and tax cuts will boost profit growth.
Let us, thus, focus on banks that are likely to make the most of the fourth-quarter earnings season. Such banks are positioned to report upbeat earnings results, which will eventually lead to an uptick in share price.
Heightened Volatility to Boost Trading Revenues
Solid employment numbers and holiday retail sales do give us a feeling that the U.S. economy is in sound shape. But, trade tensions with China and a government shutdown have spurred erratic price swings in the global equity markets. Such fears threaten to weigh on the U.S. economy. Banks profits, thus, may suffer, as business houses refrain from borrowing when the economy is in doldrums.
Optimists, then again, argue that high volatility in the equity markets do lead to more trading revenues, and more commissions/spread income for the banks. Thus, heightened volatility may well boost trading revenues when big banks such as JPMorgan Chase (JPM - Free Report) , Citigroup (C - Free Report) , Bank of America (BAC - Free Report) , Wells Fargo (WFC - Free Report) , Goldman Sachs (GS - Free Report) and Morgan Stanley (MS - Free Report) start reporting earnings for the final three months of 2018 this week.
Shutdown Woes Not Too Grave
The U.S. government shutdown is now headed for an unprecedented fourth week. And that is certainly not good news for banks. After all, 800,000 federal employees aren’t getting paid, leaving several of them unable to pay mortgages and other liabilities.
However, the shutdown only began in mid-December. So, much of its adverse impact won’t weigh on banks’ fourth-quarter earnings reports. Having said that, investors should certainly look at the guidance on how banks deal with defaults if shutdown lingers.
NIMs Expected to Improve
Market pundits, by the way, are expecting faster loan growth in the fourth quarter compared to earlier quarters, according to Federal Reserve data. Commercial and industrial loans, in particular, are forecasted to lead the pack.
Net interest margins (NIMs) are expected to improve on higher short-term rates, while net interest income (NII) is forecasted to be boosted by an increase in loan growth. UBS analysts led by Saul Martinez recently said that “overall, we expect accelerating loan growth versus recent quarters, stable to slightly higher NIMs, low single digit quarter on quarter NII growth and stable credit quality.”
Tax Reforms to Help Banks’ Earnings
Since 2017, the tax overhaul has been a boon for banks. The reduction in corporate tax rates to 21% from 35% helped banks’ bottom line grow significantly. In fact, banking behemoths collectively reaped a more than $9 billion from the tax cut policy during the first nine months of 2018, per analysis by the Wall Street Journal.
JP Morgan, above all, had an effective tax rate of 20.4% in the first nine months of last year, less than 26.9% for the same period in the previous year. That saved the financial services company more than $2 billion and helped its nine-month earnings grow more than 25%, instead of 15% growth without the tax savings.
And Wall Street analysts do believe that fourth-quarter results will mark the last period in which the new tax reform will help boost earnings growth.
4 Bank Stocks to Buy Heading Into Q4 Earnings
The aforesaid factors will surely help banks stay afloat this earnings season. For the Finance sector, to which the Major Banks industry is the biggest earnings contributor, total fourth-quarter earnings are expected to grow 18.6% from the same period last year on 3.5% higher revenues. This would follow 31.8% earnings growth in the preceding quarter on 5.1% higher revenues.
This calls for investing in four banks, which are expected to report a significant uptick in fourth-quarter earnings. These stocks have a positive earnings surprise and are more likely to positively surprise in the future. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Northrim BanCorp, Inc. (NRIM - Free Report) operates as the bank holding company for Northrim Bank that provides commercial banking products and services to businesses and professionals in Alaska. The stock currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current-year earnings has increased 3.5% in the past 90 days. It has an average positive earnings surprise of 16.3%. The company is expected to report earnings results for the quarter ending December 2018 on Feb 4.
First Foundation Inc. (FFWM - Free Report) provides financial services to individuals, businesses, and other organizations in the United States. It operates in two segments, Banking; and Investment Management and Wealth Planning. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings has increased 6.6% in the past 90 days. It has an average positive earnings surprise of 3.7%. The company is expected to report earnings results for the quarter ending December 2018 on Jan 30. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Bancorp, Inc. (TBBK - Free Report) operates as the financial holding company for The Bancorp Bank that provides banking products and services in the United States. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings has increased 2.6% in the past 90 days. It has an average positive earnings surprise of 2.8%. The company is expected to report earnings results for the quarter ending December 2018 on Jan 24.
First Financial Corporation (THFF - Free Report) offers commercial, mortgage, and consumer lending services. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings has increased 1.1% in the past 90 days. It has an average positive earnings surprise of 12.6%. The company is expected to report earnings results for the quarter ending December 2018 on Feb 5.
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