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First-quarter 2021 earnings for bank stocks started on an impressive note. All banks that reported quarterly numbers so far have witnessed solid support from fee income sources and reserve releases. This reflects that banks are showing strong resilience as the economy recovers despite lower rates and weak loan demand.
This time, bank stocks are in the spotlight as their financial performance is considered one of the barometers of nation’s economy. Though business activities gradually resumed during the second half of 2020, demand for loan remained soft even in the first quarter of 2021. Management commentary from banks that have so far released results indicates that corporates took advantage of ultra-low bond yields and fulfilled their demand for working capital. This is primarily the reason for low loan demand.
Thus, because of muted loan growth and near-zero interest rates, banks’ interest income and net interest margins (one of the key metrics for gauging profitability) are expected to have been adversely impacted to a large extent. Nonetheless, steepening of the yield curve in last part of the quarter may have offered some support.
Now coming to fee income sources, let’s begin with trading revenues. Similar to 2020, the first quarter saw significant market volatility, along with higher client activity. Hence, banks’ trading revenues are expected to have improved, thereby, aiding top-line growth.
Growth in mortgage originations was robust in the quarter, while refinancing activities continued to show significant improvement, mainly driven by historically low mortgage rates. Thus, this is expected to have supported banks’ mortgage banking businesses.
Further, given the low rates and the Federal Reserve’s bond purchase program, bond issuance volumes were solid in the quarter. Also, IPO activities remained stellar, and as companies continued to build liquidity amid solid equity market performance, there was a rise in follow-up equity issuances. These are likely to have aided underwriting revenues in the to-be-reported quarter.
Additionally, similar to the second half of 2020, deal making continued at a faster pace in the quarter on the back of global roll-out of COVID-19 vaccines, a brighter macroeconomic outlook and lower interest rates. Though the deal volume didn’t show much improvement, the total value of pending/completed transactions grew drastically. So, advisory fees are expected to have risen and offered much support to banks’ revenues this time.
On the cost front, with majority of employees still working from home, banks are expected to have recorded a fall in overhead expenses in the first quarter. Yet, with the increase in 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, with the economy gradually rebounding from the coronavirus-induced mayhem and uncertainty, banks started releasing reserves that were set aside in the early part of 2020. The trend is likely to have continued in the first quarter of 2021.
Q1 Earnings Expectations & Performance So Far
The Zacks Finance sector’s (of which banks is a major part) earnings are projected to jump 89.7% year over year in the first quarter. This is compares favorably with 13.6% growth recorded in fourth-quarter 2020.
To date, we have first-quarter numbers from more than 41% 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 later this week and next week. Total earnings for these finance companies are up 174.5% year over year on 14.1% 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 Potential Outperformers?
With the performance of bank stocks likely to be impressive 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.
5 Best Bets
Given below are five bank stocks that have the right combination of elements to beat on earnings in their upcoming announcements:
Huntington Bancshares HBAN has an Earnings ESP of +1.73% and a Zacks Rank of 3. It is slated to report results on Apr 22. Further, the Zacks Consensus for earnings has remained unchanged at 33 cents per share over the past month.
The Earnings ESP for Glacier Bancorp GBCI is +6.10% and it has a Zacks Rank of 2 at present. The company is set to report quarterly numbers on Apr 22. The consensus estimate for earnings of 75 cents per share has been revised 1.4% upward over the past 30 days.
Regions Financial RF is set to report first-quarter earnings on Apr 23. The Zacks Consensus Estimate for its earnings of 48 cents per share has moved 4.3% upward over the past 30 days. The company currently has an Earnings ESP of +1.60% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Earnings ESP for New York Community Bancorp NYCB is +2.02% and it carries a Zacks Rank of 2 at present. The company is scheduled to release quarterly figures on Apr 28. Further, over the past month, the Zacks Consensus for earnings has remained unchanged at 27 cents per share.
Prosperity Bancshares PB is set to report first-quarter earnings on Apr 28. The company currently has an Earnings ESP of +2.44% and a Zacks Rank of 3. The Zacks Consensus Estimate for earnings climbed by a penny to $1.38 per share over the past month.
Zacks Top 10 Stocks for 2021
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Regions Financial Corporation (RF) : Free Stock Analysis Report
Huntington Bancshares Incorporated (HBAN) : Free Stock Analysis Report
Prosperity Bancshares, Inc. (PB) : Free Stock Analysis Report
New York Community Bancorp, Inc. (NYCB) : Free Stock Analysis Report
Glacier Bancorp, Inc. (GBCI) : Free Stock Analysis Report
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