U.S. banks, forming a broader part of the financial sector, have always drawn substantial attention from investors during the earnings season. The industry backdrop for banks remained tough in the first three quarters of 2014 and the fourth quarter was even tougher.
Results from the mega players reflect lackluster mortgage-banking and client activities, soft trading volumes, restructuring expenses and elevated legal costs. Also, weak energy lending owing to the drastic fall in oil price was a major headwind.
Further, stringent regulations continue to affect banks’ investment activities and lead to higher compliance costs.
As falling net interest income is expected to be more than offset by a marginal rise in fee and other income, overall revenue growth will remain modest. On the other hand, growth in interest income will likely remain muted owing to sluggish loan demand and persistent pressure on net interest margins from a still low rate environment.
Also, any improvement in non-interest revenues is anticipated to face adverse impact from declining mortgage banking income and continued slowdown in fixed income and currencies and commodities (“FICC”) income. However, investment banking should support fee income to some extent, driven by continued strength in M&A and IPO activities.
Additionally, expense-control initiatives as well as stable balance sheets will serve as catalysts for growth. Also, favorable equity market and gradually improving macroeconomic factors (falling unemployment rates, rising GDP growth rate 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 13.7%. However, Banks & Thrifts seem to have performed relatively better and are expected to witness earnings growth of 10.2%.
Though the overall banking scenario appears bleak, it is possible to turn the odds in your favor. 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.
How to Select Favorable Stocks?
Choosing the right stocks could be quite difficult unless one knows the right 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:
M&T Bank Corporation (NYSE:MTB) has a Zacks Rank #3 and an Earnings ESP of +0.52%. The Zacks Consensus Estimate for the fourth quarter is pegged at $1.94 per share.
Headquartered in Buffalo, N.Y. M&T Bank operates branch offices in New York, Maryland, Pennsylvania, Delaware, New Jersey, Virginia and the D.C.
-- M&T Bank will announce fourth-quarter and full year 2014 results before the opening bell on January 20.
BancorpSouth, Inc. (NYSE:BXS) has a Zacks Rank of #2 and an Earnings ESP of +3.23%. The Zacks Consensus Estimate for the fourth quarter stands at 31 cents per share.
Based in Tupelo, MS, BancorpSouth operates as a financial holding company for BancorpSouth Bank. The company specializes in providing commercial and financial services to individuals and small-to-medium businesses. The company offers services through more than 290 offices located in Mississippi, Tennessee, Alabama, Arkansas, Texas, Florida, Missouri and Illinois.
-- BancorpSouth is slated to report fourth-quarter and 2014 results after the market closes on Jan 21.
BB&T Corp. (NYSE:BBT) carries a Zacks Rank #3 and has an Earnings ESP of +1.37%. The Zacks Consensus Estimate for the fourth quarter is 73 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 fourth-quarter and full year 2014 results before the opening bell on Jan 22.
Associated Banc-Corp (NASDAQ:ASBB) is a Zacks Rank #3 stock with an Earnings ESP of +3.33%. The Zacks Consensus Estimate for fourth-quarter 2014 is pegged at 30 cents per share.
Headquartered at Green Bay, WI, Associated Banc-Corp is a bank holding company and provides its services through its subsidiaries Associated Bank, National Association and several other non-banking subsidiaries. The company has nearly 200 banking offices offering an array of banking and non-banking products and services.
-- Associated Banc-Corp is slated to announce fourth-quarter and full year 2014 results on Jan 22, after the market closes.
Future Roadmap
Although 2014 did not turn out to be a very good year for the banking sector as a whole, investors eyeing a long-term investment perspective have to be patient. Banks are undertaking different measures to remain profitable despite several challenges, and turn the tide in their favor.