U.S. banks, forming a broader part of the financial sector, always draw maximum attention. The industry backdrop for banks remained tough in the first two quarters of 2014, and the third quarter was no different.
Weaker consumer and corporate activities, lackluster mortgage-banking activities, soft trading volumes, restructuring expenses and mounting legal costs continue to put significant pressure on bottom-line growth. Also, stringent regulations continue to affect banks’ investment activities and lead to a rise in compliance costs. Stricter capital requirements further add to the woes.
Moreover, growth in interest income is expected to remain subdued owing to sluggish loan growth and persistent pressure on net interest margins from a still low-rate environment. Further, improvement in non-interest revenues is likely to be hampered by lower mortgage banking income and continued downturn in fixed income and currencies and commodities (FICC). However, investment banking should support fee income to some extent, driven by continued strength in M&A and IPO activities.
Additionally, expense control initiatives (through streamlining of businesses and job cuts) as well as stable balance sheets will serve as catalysts. Also, favorable equity market and gradually improving macroeconomic factors (falling unemployment rates and stabilizing housing markets) are expected to act as tailwinds.
Nevertheless, Major Banks seem to have suffered the most during the quarter with an expected year-over-year earnings decline of 21.6%. However, Banks and Thrifts seem to have performed well and could witness 12.5% earnings growth.
Though the overall scenario appears dismal, you can turn the odds in your favor. Reflecting the weakness in the sector, banking stocks look relatively cheaper now. Hence, selecting a few banking stocks with a huge short-term growth potential is expected to yield a solid return.
We have picked a handful of stocks that will likely beat earnings estimates in their upcoming release. An earnings beat should raise investors’ confidence in these stocks, leading to rapid price appreciation.
Stock Selection
Choosing the right stocks could be quite difficult unless one knows the method. One way of doing so is by selecting stocks that have the combination of a favorable Zacks Rank -- Zacks Rank #1 (Strong Buy) or #2 (Buy) or #3 (Hold) -- and a positive Zacks Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise with their upcoming earnings announcements. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, chances of a positive earnings surprise are as high as 70%.
Here are 4 bank stocks that have the right combination of elements to deliver an earnings beat when they release their results later this week:
PrivateBancorp, Inc. (NASDAQ:PVTB) has a Zacks Rank #1 and an Earnings ESP of +2.13%. The Zacks Consensus Estimate for the third quarter is 47 cents per share.
PrivateBancorp operates as the bank holding company for The PrivateBank and Trust Company. The company provides various business and personal financial services to middle market companies and consumers.
The company has registered an average positive earnings surprise of 11.0% over the trailing 4 quarters. PrivateBancorp will announce its third-quarter 2014 results before the opening bell on October 16.
First Republic Bank (NYSE:FRC) has a Zacks Rank #2 and an Earnings ESP of +1.27%. The Zacks Consensus Estimate for the first quarter is pegged at 79 cents per share.
Headquartered in San Francisco, CA, First Republic Bank is a commercial bank and trust company. The company specializes in providing personalized, relationship-based preferred banking, preferred business banking, real-estate lending, and trust and wealth management services to customers in metropolitan areas across the U.S.
First Republic Bank is slated to report third-quarter 2014 results before the market opens on October 16.
BB&T Corp. (NYSE:BBT) carries a Zacks Rank #3 and has an Earnings ESP of +1.41%. The Zacks Consensus Estimate for the third quarter is 71 cents per share.
Founded in 1906 and headquartered in Winston-Salem, NC, BB&T is a diversified financial holding company. The company is one of the major providers of banking and financial products in the country. In addition, the company provides insurance brokerage, asset management, trust, treasury, investment banking, securities brokerage and other financial services.
BB&T is scheduled to report third-quarter 2014 results before the opening bell on October 16.
SunTrust Banks, Inc. (NYSE:STI) is a Zacks Rank #3 stock with an earnings ESP of +7.32%. The Zacks Consensus Estimate for third-quarter 2014 is 82 cents per share.
Incorporated in 1984 under the laws of the state of Georgia and headquartered at Atlanta, GA, SunTrust Banks Inc. is a diversified financial services holding company. The company operates through its principal banking subsidiary SunTrust Bank, which provides various financial services to individuals and corporate customers in the U.S.
SunTrust is scheduled to announce third-quarter results on October 17, before the opening bell.
Road Ahead
Despite the anticipated pressure on bank earnings this quarter, investors eyeing a long-term investment perspective have to be patient. Though we do not see banks returning to their pre-crisis level any time soon, these institutions are taking measures to remain profitable.