Most of the banks, which have reported results for the first-quarter earnings season so far, have recorded significantly higher provisions owing to the apprehended impact of the coronavirus pandemic. This has severely affected earnings growth.
Banks remained in the spotlight during the first quarter because of a number of reasons. While the U.S. economy was growing moderately in 2019, the situation worsened in the first quarter of this year, owing to the coronavirus outbreak, which disrupted business activities across the globe. With overall business activities coming to a halt, the lending scenario, which was solid in the first two months of the year, was significantly hampered in March. Hence, the overall lending scenario remained decent during the quarter, with commercial and industrial, and real estate loan portfolios having offered considerable support. Notably, in mid-March, in order to support the U.S. economy from the virus-induced slowdown, the Federal Reserve reduced benchmark rates to near zero. Thus, this is expected to have negatively impacted banks’ interest income growth and net interest margins (one of the key metrics for gauging banks’ profitability) to an extent in the first quarter. However, decent overall loan growth might have been an offsetting factor. Moreover, banks’ investment banking performance is likely to have been weak in the quarter. The virus outbreak significantly hampered global M&A activity during the quarter. Moreover, despite decent equity market performance in the first two months of the year, equity issuances dried up in March as a result of significant market volatility. Also, while bond issuance volumes were solid, debt issuances were muted. Thus, growth in advisory fees, and equity underwriting and debt origination fees are likely to have been soft. Nevertheless, while mortgage origination volumes were muted in the quarter, refinancing activities improved mainly owing to the decline in mortgage rates. Apart from this, rise in demand for residential real estate loans is expected to have supported mortgage banking income of banks. On the trading front, as the virus-related concerns resulted in an unexpected rise in market volatility along with higher client activity, trading revenues are expected to have improved significantly in the first quarter. Further, banks have been undertaking measures to improve digital offerings with an aim to starve off competition from FinTech firms. Thus, increased investments in technology upgrades might have escalated costs moderately. In the S&P 500 universe, the Zacks Finance sector’s total earnings, of which banks account for a major part, are projected to have declined 24.2% year over year in the first quarter. This compares unfavorably with 7.3% growth recorded in the fourth quarter of 2019. (For a detailed look at the earnings outlook for this industry and others, please read our Earnings Preview article.) Picking Winners Despite the overall dismal outlook for the banking sector, we have selected some banking stocks that are well-positioned to beat earnings estimates in their upcoming releases. Choosing stocks with earnings beat potential might be a difficult task unless one knows the process to shortlist. One way to do it is by picking stocks that have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. 5 Banks Set for Earnings Surprises Here are five bank stocks that have the right combination of elements to deliver positive earnings surprises in their upcoming announcements: Ameris Bancorp ABCB is set to report first-quarter earnings on Apr 23. The company currently has an Earnings ESP of +2.14% and a Zacks Rank of 3. You can see . the complete list of today’s Zacks #1 Rank stocks here The Earnings ESP for Heartland Financial USA, Inc. HTLF is +11.90% and it carries a Zacks Rank of 3 at present. The company is scheduled to release quarterly figures on Apr 27. Hope Bancorp, Inc. ( HOPE Quick Quote HOPE - Free Report) has an Earnings ESP of +15.23% and a Zacks Rank of 3. It is slated to report results on Apr 28. Prosperity Bancshares, Inc. ( PB Quick Quote PB - Free Report) is scheduled to release results on Apr 29. The company, which currently carries a Zacks Rank of 3, has an Earnings ESP of +0.86%. The Earnings ESP for S&T Bancorp, Inc. STBA is +4.81% and it has a Zacks Rank of 3 at present. The company is set to report quarterly numbers on Apr 30. 5 Stocks Set to Double Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth. Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor. Today, See These 5 Potential Home Runs >>