Among the S&P 500 sectors, banks are well placed to see encouraging Q2 earnings growth compared to the year-earlier quarter. Even though an imminent rate cut on a strong jobs report may be a concern, most of the major banks have passed the stress test and are rewarding shareholders with billions in buybacks and dividend hikes.
This bullishness puts the spotlight on banks that are likely to make the most of this earnings season. Banks are poised to report steady earnings growth, which will eventually lead to an uptick in share price.
How Will Banks Fare This Earnings Season?
Fed chief Jerome Powell has dropped enough hints regarding a potential rate cut later this month and this is primarily because of two major issues. As Powell categorically puts it, trade-related matters remain unresolved and concerns about global economic growth continue to weigh on the U.S. economy. Powell’s statement to the House lawmakers comes at a time when Trump is building pressure on the Fed to cut interest rates to bolster the U.S. economy.
A rate cut, thus, doesn’t bode well for banks. This is because lower interest rates will dent bank profits as they reduce the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
However, the counter argument is that anticipation of cuts in the federal funds rate has led to a considerable fall in long-term rates, which means there will be an improvement in mortgage loan refinancing activity leading to more fee income for banks.
So, we can surely expect a good run for banks this earnings season. And let’s face it, strong credit quality, plenty of working capital and a friendly regulatory environment will help banks record significant earnings growth.
Thanks to the green light provided by the Fed, banks are rewarding shareholders with billions of dollars of share buybacks and hikes in dividends. The nation’s top 18 banks have passed the Fed’s stress test, which means such banks can easily buy back shares and raise dividends, and still have plenty of cash counter recessionary pressure in the near term.
Some of the prominent banks that have announced share buybacks and dividend hikes include JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo & Company (WFC - Free Report) and Citigroup Inc. (C - Free Report) . J P Morgan announced plans to buy back $29.4 billion in shares and increase its dividend payout by 12.5% to 90 cents a share.
Similarly, Wells Fargo said it plans to buy back $23.1 billion in shares next year and increase its dividend 13.3% to 51 cents a share. Citigroup too announced that it would buy back $17.1 billion in stock next year and lift its dividend to 13.3% to 51 cents a share.
Randal Quarles, the Fed's vice chair for supervision, summed up by saying that “the stress tests have confirmed that the largest banks are both well capitalized and place a high priority on strong capital planning practices.” The Fed, by the way, concluded that banks are well-equipped to bear any significant decline in commercial real estate prices as well as increase in stress in corporate debt markets.
5 Bank Stocks to Gain Heading Into Q2 Earnings
The aforesaid factors will somehow help banks stay afloat this earnings season. For the Finance sector, to which the Major Banks industry is the biggest contributor, total first-quarter earnings are expected to grow 2.4% from the same period last year on 5.6% higher revenues (read more: What to Expect from Bank Earnings?).
This call for investing in banks, which are expected to report a significant uptick in Q2 earnings. These stocks flaunt a positive Earnings ESP — our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Northwest Bancshares, Inc. (NWBI - Free Report) operates as a holding company for Northwest Bank that offers various personal and business banking solutions. The company is expected to report earnings results for the quarter ending June 2019 on Jul 22. Northwest Bancshares has an Earnings ESP of +2.57%. The company’s expected earnings growth rate for the current quarter and year are 12% and 8.8%, respectively. The stock has a Zacks Rank #2 (Buy).
Prosperity Bancshares, Inc. (PB - Free Report) operates as a bank holding company for the Prosperity Bank that provides retail and commercial banking services to small and medium-sized businesses as well as consumers. The company is expected to report earnings results for the quarter ending June 2019 on Jul 24. Prosperity Bancshares has an Earnings ESP of +0.75%. The company’s expected earnings growth rate for the current year is 3.7%. The stock has a Zacks Rank #2.
BB&T Corporation (BBT - Free Report) provides banking and trust services for small and mid-size businesses, public agencies, local governments, corporations, and individuals in the Southeastern and Mid-Atlantic United States. The company is likely to report earnings results for the quarter ending June 2019 on Jul 18. BB&T has an Earnings ESP of +1.24%. The company’s expected earnings growth rate for the current quarter and year are 6.9% and 5.9%, respectively. The stock has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
BancorpSouth Bank (BXS - Free Report) provides commercial banking and financial services to individuals and small-to-medium size businesses. The company is expected to report earnings results for the quarter ending June 2019 on Jul 17. BancorpSouth has an Earnings ESP of +0.83%. The company’s expected earnings growth rate for the current quarter and year are 8.9% and 5.4%, respectively. The stock has a Zacks Rank #3.
M&T Bank Corporation (MTB - Free Report) operates as the holding company for Manufacturers and Traders Trust Company; and Wilmington Trust, National Association that provide banking services. The company is expected to report earnings results for the quarter ending June 2019 on Jul 18. M&T Bank has an Earnings ESP of +0.20%. The company’s expected earnings growth rate for the current quarter and year are 12.5% and 13.1%, respectively. The stock has a Zacks Rank #3.
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