U.S. banks are anticipated to see a feeble start to the earnings season this week. And it’s solely because of declining interest rates, which may have had a negative impact on net interest margins. Needless to say, a banks’ profit margin heavily depends on its net interest income or the difference between the rates they charge as long-term loans and the rate they pay for short-term borrowings.
For third-quarter earnings, the Major Banks industry, including JPMorgan and Wells Fargo, is expected to see an earnings decline of 9.4% from the same period last year despite 0.3% higher revenues (read more:
What to Expect from Q3 Earnings Season with Big Banks Set to Report?).
Part of the problem is Fed’s move to trim interest rates in July and September. The Fed cut target interest rate by 25 bps to a range of 1.75-2% last month to lend support to an economy which was grappling with trade tensions and other heightened geopolitical issues. Decline in business investments as well as exports coupled with persistently-low levels of inflation were cited as reasons behind the rate cuts.
Lest we forget, in July, Fed officials voted to trim rates by a quarter percentage point to a range between 2% and 2.25%. Fed Chair Jerome Powell had said that rate cuts were primarily due to two reasons. Firstly, as Powell categorically puts it, trade-related matters remain unresolved, and secondly, concerns about global economic growth continue to weigh on the U.S. economy.
Big banks, in particular Citigroup, have already given hints that interest rate cuts will adversely impact their net interest income. Citigroup stated that an interest rate cut by 25 basis points would affect its quarterly revenues by $50 million. What’s more disturbing for banks was that President Trump wanted the Fed to slash rates more aggressively, thanks to record-low unemployment levels.
Nonetheless, things are not all gloomy for banks. Strength in mortgage banking might provide some respite. Refinancing, which accounts for most of mortgage applications, has more than doubled from a year ago, per Mortgage Bankers Association data. And Manulife Investment Management’s Lisa Welch, who manages the John Hancock Regional Bank Fund, said that “with rates being lower, we think mortgage activity will be very strong.”
Banks’ valuations, by the way, also look attractive. The index’s trading multiple of 10.2 times earnings estimate for the next 12 months compares well to the broader S&P 500’s recent trading multiple of 16.4.
5 Bank Stocks to Gain Heading Into Q3 Earnings
The aforesaid factors will surely help some banks stay afloat this earnings season. This calls for investing in such banks, which are expected to report a significant uptick in third-quarter 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. FS Bancorp, Inc. FSBW operates as a bank holding company for 1st Security Bank of Washington that provides banking and financial services to local families, local and regional businesses, and industry niches. The company is expected to report earnings results for the quarter ending September 2019 on Oct 24. FS Bancorp has an Earnings ESP of +1.37%. The company’s expected earnings growth rate for the current quarter and year are 25.9% and 6%, respectively. The stock has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. First Financial Northwest, Inc. FFNW operates as the holding company for First Financial Northwest Bank that provides commercial banking services in Washington. The company is expected to report earnings results for the quarter ending September 2019 on Oct 24. First Financial Northwest has an Earnings ESP of +4.55%. The company’s expected earnings growth rate for the next quarter is 9.5%. The stock has a Zacks Rank #3 (Hold). BancorpSouth Bank ( BXS Quick Quote 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 September 2019 on Oct 21. BancorpSouth has an Earnings ESP of +2.61%. The company’s expected earnings growth rate for the current quarter and year are 8.9% and 2.7%, respectively. The stock has a Zacks Rank #3. M&T Bank Corporation MTB 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 September 2019 on Oct 17. M&T Bank has an Earnings ESP of +0.34%. The company’s expected earnings growth rate for the current quarter and year are 1.4% and 7.7%, respectively. The stock has a Zacks Rank #3. PacWest Bancorp PACW provides commercial banking products and services. The company is expected to report earnings results for the quarter ending September 2019 on Oct 15. PacWest Bancorp has an Earnings ESP of +1.53%. The company’s expected earnings growth rate for the current year is 3.5%. The stock has a Zacks Rank #3. Today's Best Stocks from Zacks
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