Third-quarter 2021 results for bank stocks started on an impressive note. Almost all banks, which have reported quarterly numbers so far, have witnessed solid support from fee income sources and reserve releases. These aided overall profitability despite the continued low interest-rate environment.
The financial performance of bank stocks is considered as one of the barometers of the nation’s overall health. As economic growth gained traction, the demand for loans increased slightly in the third quarter. While the demand for commercial and industrial loans remained muted, real estate loans and consumer loan balances increased.
Thus, despite the continued low interest-rate environment, banks’ interest income and net interest margins (one of the key metrics for gauging profitability) are expected to have been positively impacted by decent loan growth. The steepening of the yield curve is also expected to have offered support.
Now coming to fee income sources, let’s begin with trading revenues. Unlike 2020 and the first few months of 2021, wherein significant market volatility and client activity aided trading revenues; market normalization and reduced volatility are expected to have dampened overall trading business this time around. Thus, banks’ trading revenues are not expected to have offered much support to the top line.
Mortgage originations continued to rise in the third quarter as low mortgage rates fuelled the demand for mortgages. However, a gradual slowdown in refinancing activities was witnessed, which along with faster prepayments weighed on banks’ mortgage banking businesses.
Continued momentum in the IPO market, a steady rise in follow-up equity issuances and decent bond issuance volumes are expected to have offered support to banks’ underwriting revenues in the to-be-reported quarter.
As the last few quarters, the third quarter continued to witness a rapid pace of deal-making across the globe, leading to a drastic rise in deal volumes and value. This was largely driven by the resumption of normal business activities, excess cash levels, companies’ appetite for strengthening scale and market share, and solid economic recovery. Thus, banks’ advisory business is likely to have shown impressive growth.
On the cost front, as banks are increasing the use of virtual mediums for communication and other business activities; technology costs are expected to have risen to some extent. Also, banks have been undertaking several business-restructuring initiatives, which are likely to have led to higher costs.
Now coming to credit costs, continuing with the trend of the past few quarters, and driven by an improving macroeconomic backdrop and stable credit market conditions, banks, in the third quarter, released reserves, which were taken to cover losses from the effects of the coronavirus pandemic in the first half of last year.
Q3 Earnings Expectations & Performance So Far
The Zacks Finance sector’s (of which banks are a major part) earnings are projected to rise 24.7% year over year in the third quarter of 2021. This compares unfavorably with 147% growth recorded in second-quarter 2021.
To date, we have third-quarter numbers from more than 40% of the sector’s total market capitalization in the S&P 500 Index and a large part of the remainder are slated to announce results this and next week. Total earnings for these finance companies are up 42.2% year over year on 9.9% growth in revenues.
(For a detailed look at the earnings performance and growth projections for this sector and others, please read our Earnings Preview article.)
How to Pick the Potential Outperformers?
As the performance of bank stocks is likely to be solid this time, shortlisting those having the potential to beat earnings estimates can be daunting. 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.
3 Best Bets
Three bank stocks are given below, which have the right combination of elements to beat earnings estimates in their upcoming announcements:
KeyCorp KEY is scheduled to report quarterly numbers on Oct 21. The company has an Earnings ESP of +0.56% and a Zacks Rank of 3 at present. The Zacks Consensus for its third-quarter earnings has been revised 3.6% upward to 57 cents per share over the past 30 days.
BankUnited, Inc. BKU is also slated to report quarterly results on Oct 21. The company currently has an Earnings ESP of +2.09% and a Zacks Rank of 3. Its earnings estimates for the to-be-reported quarter have been revised 1.1% upward to 88 cents over the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
East West Bancorp, Inc. EWBC is also slated to report quarterly earnings tomorrow. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +1.14%. Its quarterly earnings estimates have been unchanged at $1.50 per share over the past month.
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