The overall market performance has been great in 2017. With gradual improvement in the U.S. economy, rising rate environment, potential benefits from lower tax rates and growing investor optimism regarding reduced regulations, the banking industry has emerged as one of the best performers this year.
Although bank stocks did not gain much in the first few months of the year, the S&P Regional Banks Select Industry Index and the KBW Nasdaq Bank Index have gained nearly 8.4% and 17.8%, respectively, so far this year.
Why the Rally Will Likely Continue in 2018
Higher interest rates: The Fed has plans of increasing interest rates thrice in 2018. While this alone has the potential to drive the markets, anticipated higher inflation may lead the central bank to move the interest rate higher at a faster pace, as economic growth improves further. Higher rates help banks in expanding their net interest margins, which drives revenue growth. Even if the interest rate increases take place at the expected pace, it will further strengthen financial performance of banks.
Reduced tax burden: The passage of the amended tax bill by the Senate will likely drive bank stocks’ earnings in 2018. While the reduction in corporate tax rates from 35% to 21% will have a positive impact on all the sectors, it is likely to benefit banks the most as they are amongst the highest tax payers in the United States. Although the news has already given a boost to investor confidence, the benefit of the same is expected to be witnessed next year.
Also, driven by the tax legislation provisions related to repatriation of overseas cash, mergers and acquisitions are likely to increase in the United States, which will boost banks’ investment banking income. Also, since the tax bill will lower tax rates for the rich, the wealth management divisions of banks will likely witness an increase in cash flow.
Although lower taxes will reduce the tax deductible expenses for banks that will likely weigh on their profitability, the overall impact of the tax bill is projected to be a positive.
Lesser regulations: Banks have been burdened with stringent regulations following the 2008 financial crisis. This has led to significant rise in compliance costs for banks. Notably, reduction in stringent regulations is expected to be implemented soon as part of President Donald Trump’s election promise. Though no time frame has been outlined for execution, the announcement of a bipartisan agreement has helped investors regain confidence.
Per the agreement, there is likely to be a reduction in the number of banks labeled as systemically important financial institutions (SIFI). The banks, which will be removed from this group, will no longer have to abide by the stricter regulatory requirements that come along with the tag. This will thereby help banks in reducing regulatory compliance costs and is expected to lead to a wave of M&As for the banking industry.
Improving economy: The Fed has projected economic growth of 2.5% for 2018 (up from the prior guidance of 2.1%). A slew of favorable data including continued strengthening of the labor market, increase in household spending, lower unemployment rate and rise in business activities will support growth in 2018. Improving economy will spur a rise in lending activities and thus banks will benefit from the same.
Choosing the Winning Stocks
The entire banking industry is likely to benefit from the favorable factors. So, it is not an easy task to find the potential winners.
Hence, we have taken the help of the Zacks Stock Screener to shortlist five such stocks that have market capitalization of more than $1 billion and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
To further cut short the list, we selected those stocks that have projected earnings per share (EPS) growth of more than 5% for 2018 and have witnessed positive estimate revision over the past 60 days.
First Financial Bancorp. FFBC, based in Cincinnati, OH, has a market cap of $1.68 billion and projected EPS growth of 17.6% for 2018. The stock currently carries a Zacks Rank of 2.
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Hancock Holding Company HBHC also has a Zacks Rank of 2 and a market cap of $4.14 billion. The company is based in Gulfport, MS and its projected EPS growth for the next year is 20.9%.
Heartland Financial USA, Inc. HTLF, headquartered in Dubuque, IA, has a market cap of $1.53 billion. The stock carries a Zacks Rank #2 and its projected EPS growth is 15.9%.
Lakeland Financial Corporation LKFN is headquartered in Warsaw, IN. This Zacks Rank #2 stock has a market cap of $1.22 billion. Its earnings are projected to grow 6.3% in 2018.
Webster Financial Corporation WBS also has a Zacks Rank #2 and is based in Waterbury, CT. It has a market cap of $5.52 billion and projected EPS growth of 9.6% for 2018.
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First Financial Bancorp. (FFBC) : Free Stock Analysis Report
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Hancock Holding Company (HBHC) : Free Stock Analysis Report
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