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5 Bank Stocks to Buy as BOJ Chalks Out Policy Shift Plans

Tirthankar Chakraborty
U.S. 10-year Treasury yield logged its biggest daily rise in seven weeks, tracking a massive move in Japanese rates, following reports that the BOJ could make changes to its monetary policy.

The Bank of Japan (BOJ) conducted massive bond purchases in the past to check rise in Japanese bond yields. But now, it is holding preliminary discussions on making alteration to its interest rate targets, which sparked a selloff in bonds and pushed yields higher. U.S. bond yields rise after massive move in Japanese government bond yields.

Bank stocks scaled north, especially after the U.S. 10-year Treasury yield logged its biggest daily rise in seven weeks. Banks benefit from a rise in interest rate. Hence, investing in sound bank stocks seems judicious for now.

BOJ Might Adjust Monetary Policy

The BOJ has been involved in acquiring massive amounts of Japanese government bonds and exchange-traded funds to increase the money supply in the economy. At the same time, the BOJ has adopted a “yield curve control”, which aims to keep the 10-year Treasury note at around 0% and short-term rates negative through the use of bond purchases.

But policymakers are now criticizing Governor Haruhiko Kuroda’s massive easing program as it failed to combat stubbornly low inflation in the region. The central bank’s preferred measure of inflation slowed for a third consecutive month to just 0.2%. The BOJ’s inflation target, in the meanwhile, has been around 2%.

As per a Reuters report, people who are familiar with the central bank’s stance, said that BOJ may make tweaks to its monetary policy for the first time since 2016. Focus is on making the massive stimulus program more sustainable given that it may take much longer time to achieve the 2% inflation target. There may be changes to its interest rate targets and stock buying techniques.

Bond Yields Log Record One-Day Climb

Japanese government bond prices nosedived on speculations that the BOJ may make policy adjustments, which may lead to higher interest rates. On the contrary, the Japan 10-year bond yield notched its biggest one-day climb in almost two years, according to WSJ Market Data Group. The Japanese 10-year bond yield went up to 0.83% from 0.32% on Jul 23. Needless to say, bond prices move opposite to the direction of yields.

The yield on the U.S. benchmark 10-year Treasury note followed suit, jumping 6.8 basis points to 2.963%, its biggest one-day rise since Jun 1. The 30-year bond yield increased 7 basis points to 3.101% and marked its largest one-day jump since May 15. The two-year note yield, in the meantime, picked up 3.4 basis points to 2.633%, marking its highest since July 2008.

When Yields Rise, Buy Bank Stocks

Investors are generally focused on a bank’s ability to make money through net interest margin. As the 10-year yield rises, it boosts bank profits. After all, it increases the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

The spread between long term and short-term rates also expands during interest rate hikes because long-term rates tend to rise faster than short-term rates. Fed, by the way, has already got slightly more hawkish. It has raised its benchmark federal funds rate by a quarter percentage point to a range of 1.75% to 2% last month. The Fed’s dot plot, in fact, indicated that policy makers predict two additional rate hikes this year for a total of four increases instead of three as planned earlier.

President Trump, in the meantime, expressed his displeasure with the Fed’s interest rate hikes, but, the odds of the Fed changing its policies in response are less than zero. Treasury Secretary Steven Mnuchin did clarify that both he and the President “fully support the Fed’s independence.”

5 Solid Choices

Banking on such encouraging trends, investing in fundamentally-sound banking stocks seems prudent.  We have, thus, selected five such stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

SunTrust Banks, Inc. STI operates as the holding company for SunTrust Bank that provides various financial services for consumers, businesses, corporations, and institutions in the United States. The stock currently has a Zacks Rank #2. In the last 60 days, nine earnings estimates moved north, while three moved south for the current year. The Zacks Consensus Estimate for earnings moved up 1.3% in the same period. The company’s expected earnings growth rate for the current year is 32.4% compared with the Banks - Major Regional industry’s estimated rally of 26.6%.

M&T Bank Corporation MTB provides retail and commercial banking services. The stock currently has a Zacks Rank #2. In the last 60 days, eight earnings estimates moved up, while one moved down for the current year. The Zacks Consensus Estimate for earnings advanced 2.5% in the same period. The company’s expected earnings growth rate for the current year is 37.7% compared with the Banks - Major Regional industry’s projected gain of 26.6%.

Capstar Financial Holdings, Inc. CSTR operates as the holding company for CapStar Bank that provides commercial banking services to consumer and corporate customers. The stock currently has a Zacks Rank #1. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 2.7% in the same period. The company’s expected earnings growth rate for the current year is 187.5% compared with the Banks - Southeast industry’s estimated rally of 30.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.

State Bank Financial Corporation STBZ operates as the bank holding company for State Bank and Trust Company that provides various community banking services to individuals and businesses. The stock currently has a Zacks Rank #2. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings improved 1.4% in the same period. The company’s expected earnings growth rate for the current year is 52.1% compared with the Banks - Southeast industry’s estimated rally of 30.9%.

First Financial Northwest, Inc. FFNW operates as the holding company for First Financial Northwest Bank that provides commercial banking services in Washington. The stock currently has a Zacks Rank #1. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings soared 21.5% in the same period. The company’s expected earnings growth rate for the current year is 77.5% compared with the Banks - West industry’s estimated rally of 24.9%.

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M&T Bank Corporation (MTB) : Free Stock Analysis Report
 
SunTrust Banks, Inc. (STI) : Free Stock Analysis Report
 
State Bank Financial Corporation. (STBZ) : Free Stock Analysis Report
 
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Capstar Financial Holdings Inc. (CSTR) : Free Stock Analysis Report
 
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