The banking industry seems to have been benefiting the most from the interest rate hikes this year. Year 2018 has seen four Fed rate hikes so far, the latest one being announced last week. Moreover, this is the ninth rate hike since December 2015.
Notably, banks derive benefits from a steep yield curve i.e. when long-term rates are greater than short-term rates. This is because, when short-term rates rise (to which deposits are tied), banks can charge more on loans (to which long-term rates are tied) if long-term rates are higher than short-term ones.
This helps in expanding net interest income, as well as net interest margins, for banks. Moreover, rising rates reflect an improving domestic economy as it implies that the credit quality is improving, which is beneficial for banks' profitability.
Therefore, while the recent inversion of the yield curve, which is also perceived as an early indication of an impending recession, might temporarily be bad news for banks, the banking industry as a whole is expected to still benefit from these rate hikes going into 2019, given that the Fed now plans two hikes next year as opposed to three.
In addition to this, the Tax Cut & Jobs Act, which helped banks improve their corporate earnings in 2018, is expected to aid earnings growth in the coming few quarters.
Further, given the expectation for potential lesser regulations, banks are expected to gain in the future. If the central bank’s latest proposal to significantly raise the threshold for SIFI to $250 billion in assets from the current $50 billion gets implemented, compliance costs will come down and banks will be able to utilize the freed-up capital to generate more revenues.
Additionally, the steps toward easing regulations related to the Volcker Rule are a positive for banks as it will no longer prohibit them from conducting proprietary trading.
Thus, while the uncertainty related to the U.S.-China trade war and other global issues might have a negative impact on the overall finance sector in 2019, bank stocks are expected to continue to benefit from the rise in rates as well as potential lesser regulations.
Selecting 2019 Bank Stock Winners
Based on strong fundamentals and solid earnings growth prospects, we have shortlisted stocks that are expected to continue their winning streak in 2019.
For this, we have taken the help of the Zacks Stock Screener to choose stocks that have a market cap of more than $100 million and currently carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). Our research shows that stocks with a Zacks Rank #1 or 2 offer the best investment options. You can see the complete list of today’s Zacks #1 Rank stocks here.
Further, these stocks have handily outperformed the S&P 500 Index so far in 2018.
Here are the three bank stocks that meet the criteria:
Popular, Inc.’s BPOP shares have gained 29.4% year to date against 9.6% decline for the S&P 500 Index. With a market cap of $4.61 billion, the company provides retail, mortgage, and commercial banking products and services. The stock currently has a Zacks Rank of 2.
The company’s Zacks Consensus Estimate for 2019 earnings has been revised 1.7% upward over the past 60 days.
City Holding Company CHCO also has a Zacks Rank of 2 at present. It has a market cap of $1.06 billion, and provides banking, trust and investment management, and other financial solutions in the United States. The stock has gained 2.4% year to date against 9.6% decline recorded by the S&P 500 Index.
Over the past 60 days, its earnings estimates for 2019 have been revised nearly 1% upward.
First Financial Bankshares, Inc. FFIN provides commercial banking products and services, and has a market cap of $3.68 billion. The company’s shares have gained 20.7% year to date against 9.6% decline of the S&P 500 Index. The stock currently carries a Zacks Rank #2.
Over the past 60 days, its Zacks Consensus Estimate for 2019 earnings has remained unchanged.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
These 10 are painstakingly handpicked from over 4,000 companies covered by the Zacks Rank. They are our primary picks poised to outperform in the year ahead. Be among the first to see the new Zacks Top 10 Stocks >>
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