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5 Banking Stocks With Dismal Earnings Prospects to Avoid

Radhika Saraogi

The banking sector’s performance has been quite bumpy so far in 2019. The significant turnaround witnessed in the first half was eventually offset by escalation of the U.S.-China trade war, uncertainty over Brexit and fears of global economic slowdown. As a result, the SPDR S&P Regional Banking ETF KRE and S&P Banks Select Industry Index have declined 1.8% and 1.3%, respectively, over the past three months.

Now let’s delve deeper into the factors that are hurting the prospects of banking stocks.

Banks’ major profitability indicator — net interest margin (NIM) — is expected to remain under pressure for the rest of 2019, largely due to the Federal Reserve’s move to lower rates (twice in the third quarter), and rising deposits costs.

Further, persistent trade and geopolitical tensions resulted in flattening and sometimes inversion of the yield curves all year long. This spells bad news for the sector. The spreads between short-and long-term rates narrow down at such times, hampering banks’ interest income growth and leading to decline in NIM.

Fears of global economic slowdown, Brexit-related issues and the U.S.-China trade war uncertainty were successful in keeping customers wary, resulting in lower investment activities. Thus, the corporate lending scenario have remained mostly muted in 2019, and is likely to further weigh on the banks’ interest income.

However, the artificial intelligence wave has engulfed the sector, leading to investments being made by banks to withstand the growing competition from Fintech firms. While this spending will brighten prospects, it is likely to weigh on financials in the near term.  

Also, with the increased use of technology, the banks are exposed to risks, such as those relating to cybersecurity and data protection. The banks will thus need to invest further in more secure and sophisticated mechanisms to manage such downsides.

Lastly, the banking sector benefits from a growing economy. However, recently, the U.S. economic growth has moderated as reflected by slight weakness in labor market and slowdown in manufacturing data. Further, the Fed’s accommodative monetary policy stance adds fuel to the fire.

Bank Stocks to Avoid

Thus, it is a good idea for investors to stay away from some bank stocks that have the bleakest near-term prospects.

While it’s not easy to select such stocks from the vast banking universe, we have taken the help of Zacks Stock Screener to make this task relatively simpler.

We have shortlisted five banking stocks with a market capitalization of at least $2.5 billion and a VGM Score of C or worse.

Further, these stocks carry a Zacks Rank #4 (Sell). Finally, these stocks are expected to record year-over-year decline in earnings for 2019.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Prosperity Bancshares, Inc. PB: With a market cap of $4.9 billion, the lender currently has a VGM Score of F. The company’s earnings for 2019 are expected to decline slightly year over year.

Community Bank System, Inc. CBU: With a market cap of $3.2 billion, the stock currently has a VGM Score of F. Earnings for current-year are likely to decline 3.9% year over year.

Associated Banc-Corp ASB: On a year-over-year basis, the company’s 2019 earnings are projected to decline 5%. With a market cap of $3.3 billion, this bank currently has a VGM Score of D.

Cullen/Frost Bankers, Inc. CFR: With a market cap of $5.5 billion, this stock currently has a VGM Score of D. The company’s earnings for 2019 are expected to decline nearly 1% year over year.

Chemical Financial Corporation TCF: On a year-over-year basis, the company’s current-year earnings are projected to decline 1.5%. With a market cap of $2.7 billion, this bank currently has a VGM Score of C.

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