After raising interest rates four times in 2018, the Federal Reserve reversed its stance and cut rates in July, September and October this year. Though the central bank kept rates unchanged at its latest meeting, the three cuts have largely offset the favorable impact of last year’s higher rates.
Thus, banks, which are one of the biggest beneficiaries of higher interest rates, have lost some shine. Nonetheless, with the Fed indicating a pause in rate cuts next year, one can have a look at banks with strong fundamentals and earnings prospects.
Also, positive developments related to the ongoing trade conflict between the United States and China, and strong probability of Brexit within Jan 31, 2020 are other matters that are likely to be catalysts.
Let’s dig deeper to check out the other factors that are expected to influence banks stocks in 2020.
Digitization of Operations: Banks are taking measures to improve operating efficiency. They are taking steps to upgrade technology at ATMs and branches, making these more client friendly. Though the initiatives will result in higher expenses in the near term, these are expected to support financials going forward.
Inorganic Expansion: Backed by less stringent financial regulations and large amount free cash available owing lower corporate tax rates, banks (both big and small) are undertaking expansion via acquisitions. These deals are expected to be accretive to earnings, and will lead to cost and revenue synergies. In one of the biggest banking deals in a decade, BB&T Corp acquired SunTrust Banks to form the sixth largest bank (in terms of assets) in the United States – Truist Financial (TFC - Free Report) .
Revenue Diversification: Banks are foraying into new avenues to improve revenue mix. With loan demand being moderate, banks are focusing more on generating fee income. This will enable banks to be less dependent on interest rates. Also, they are opening branches in new markets, which will support cross selling opportunities.
Strong Economy: Banks’ financials are directly related to the health of the nation. The U.S. economy continues to show strength with historically low unemployment rate. In third-quarter 2019, the country’s real GDP expanded at an annual rate of 2.1% (second estimate). In the second quarter, it was 2.0%, while in the first quarter real GDP was 3.1%. Also, per the Fed officials, the U.S. economy is expected to grow at the rate of 2.2% this year and 2% for 2020.
Steepening Yield Curve: This year began with concerns over flattening/inversion of the yield curve. This hurt banks’ net interest margin (NIM) — the key indicator of a bank’s profitability. However, the trend has reversed off late, driven by positive development on several macroeconomic woes. Thus, banks will gain from higher market interest rates as widening spread will support NIM.
Choosing the Winning Bank Stocks
At present, it will be wise to invest in bank stocks with a favorable Zacks Rank and strong growth potential. With the help of the Zacks Stock Screener, we have shortlisted four such banks, which have upside left for 2020.
These banks carry a Zacks Rank #2 (Buy) or better. Further, they have market capitalization exceeding $25 billion and earnings growth expectation of 5% or more for 2020.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Here are the four banks worth betting on:
Bank of America (BAC - Free Report) is likely to continue benefiting from steady rise in loan demand and strong deposit base. This will support this Zacks Rank #2 bank’s net interest income in the coming year.
BofA is focused on improving operating efficiency and align its banking center network according to customer needs. The bank is on track to open 500 new centers in new cities and redesign 2,500 centers with technology upgrades by 2021.
Further, the company, which has a market cap of $312.1 billion, plans to add 2,200 more ATMs to its network. These initiatives along with launching of Zelle and Erica will enable it to improve digital offerings and cross sell products.
Despite undertaking these efforts, BofA is able to control expenses. Management expects non-interest expenses for 2019 and 2020 to decline on a year-over-year basis.
BofA’s Zacks Consensus Estimate for earnings for 2020 suggests a rise of 11.8% from the year-ago reported number.
State Street (STT - Free Report) , which currently sports a Zacks Rank #1, will continue to benefit from new business wins and investment in new products. Further, synergies from strategic acquisitions and global footprint are likely to support top-line growth.
Additionally, State Street, with a market cap of $29 billion, is taking initiatives to lower expenses. For the nine months ended Sep 30, 2019, the company recorded high cost location headcount reductions of more than 2,700, exceeding the initial target of 1,500. Further, it remains on track to achieve roughly $400 million in cost savings this year.
Also, the company intends to lower information technology costs by roughly 2% in 2020, after expecting the same to rise almost 11% this year. The reduction is likely to be driven by the company’s 2020 technology optimization plan.
The plan includes increasing workforce offshore ratio by 10-15%, declining footprint across four to five high-cost locations and lowering IT offshore vendors by 33%. Also, State Street intends to reduce infrastructure external spending by 10-15%.
Driven by these expense savings efforts, technology upgrades and slightly better operating backdrop, State Street’s earnings will improve in 2020. The consensus estimate for the next year implies 10.6% earnings growth.
Citigroup’s (C - Free Report) revenues will continue to benefit from rising loan and deposit balances. Further, the company’s globally diversified operations will support financials.
The company, with a market cap of $167.9 billion, is also optimizing its branch network, with focus on core urban markets. Additionally, the ongoing investments in branded cards will support Citigroup’s growth strategy.
Further, the company is prudently managing expenses. Management targets to achieve higher end of $500-$600 million in net incremental savings this year, along with an additional $500-$600 million of net incremental benefits in 2020.
The consensus estimate for this Zacks Rank #2 stock indicates earnings growth of 9.5%.
With a market cap of $46.3 billion, BNY Mellon’s (BK - Free Report) globally diversified operations are expected to support profitability. The company’s international revenues are likely to continue improving as demand for personalized services rises across the globe.
Though management expects rate cuts to adversely impact net interest revenues this year, we believe the Fed’s stance to keep rates unchanged will offer some support in 2020. Also, the company’s operating expenses are expected to remain manageable in the upcoming quarters as it eliminates unnecessary management layers and automates processes.
The consensus estimate for 2020 for this Zacks Rank #2 stock indicates earnings growth of 6.1%.
Zacks Top 10 Stocks for 2020
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.Start Your Access to the New Zacks Top 10 Stocks >>