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5 Beaten-Down Bank Stocks to Buy for a Turnaround in 2021

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Swayta Shah
·8 min read
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The year 2020 has been a turbulent one for the stock markets. Extreme volatility largely driven by the coronavirus pandemic, and the resultant economic and health crisis is the main theme for the year.

Amid this, all the industries were hit hard and banks were not untouched. Despite beginning the year on an optimistic note, bank stocks are now among the worst performers. So far this year, SPDR S&P Regional Banking ETF and KBW Nasdaq Bank Index are down 11.1% and 11.8%, respectively, despite witnessing some bullish investor sentiments over the past two months.

Also, the Zacks Major Regional Banks industry and Zacks Banks & Thrifts industry have lost 18.1% and 10.9%, respectively. Nevertheless, the S&P 500 Index have gained 17% over the same time frame.

Year-to-Date Price Performance

 

Before we go on to discuss how 2021 will turn out for banks, let’s check out the three key factors that hurt the banks’ financials this year.

Low Rates: The Federal Reserve cut the interest rates to near-zero in mid-March to support the U.S. economy from the pandemic induced slowdown. Since then, the central bank has maintained the rates at the same level and has even signaled to keep these unchanged at least until 2023. The low rates have significantly weighed on banks’ net interest income (NII) growth and led to contraction in net interest margins.

Economic Slowdown: After coronavirus was declared a pandemic, several countries, including the United States closed down business and ordered stay-at-home. While the efforts were able to contain the spread of virus to some extent, it proved to be harmful for the economy. Though the U.S. economy grew at an annual rate of 33.4% in the third quarter of 2020, it declined 5% and 31.4%, respectively in the first and second quarters.

As business activities came to a grinding halt, the demand for loans gradually faltered. Thus, this acted a double whammy for banks as they were already reeling under low rates. Further, per the Fed projections, the U.S. economy is expected to contract 2.4% this year.

COVID-19 Related Provisions: With an aim to counter the pandemic-related crisis, banks built substantial reserves. During the first half of 2020, billions of dollars’ worth of provisions was created by banks. This hurt their bottom line significantly. Though the pace of reserve build slowed down in the third quarter, nearly 53% of FDIC-insured banks still recorded a rise in provisions for credit losses.

How Will Banks Fare in 2021?

Since the encouraging COVID-19 vaccine related data started coming out from early November, performance of bank stocks has reversed to some extent. As the vaccine developers including Pfizer and its German partner BioNTech, along with Moderna and AstraZeneca, started filing for emergency use and subsequently got the approvals for the same, this vaccine-driven rally has continued.
 
If we take a look at price performance of banks since November, it can be seen that both SPDR S&P Regional Banking ETF and KBW Nasdaq Bank Index have jumped 25.8% and 26%, respectively. Likewise, Major Regional Banks industry and Zacks Banks & Thrifts industry have gained 28.2% and 24.1%, respectively, outperforming S&P 500 Index’s rally of 13.7%, over the same time frame.

Though the vaccine-related developments have now been already priced-in by the markets, as vaccines get distributed, chances are that the economy will recover at a faster pace. Thus, along with the gradually improving consumer confidence and restoration of normal business activities, demand for loans is expected to improve. This will support NII, despite lower interest rates.

Banks’ revenues are benefiting from fee income sources like investment banking, trading and mortgage banking as well. Further, banks are digitizing operations to better align with customer needs. Banks are also resorting to opportunistic acquisitions. This will not only improve market share but will also result in diversification and add scale. All these efforts will aid banks’ financials next year.

These are likely to result in positive investor sentiments and we expect bank stocks to witness a rebound in price next year.

5 Bank Stocks Worth Betting on for 2021

This seems to be the right time to take a look at fundamentally solid bank stocks that have lost ground this year on account of tough operating backdrop. These stocks are now likely to bounce back on favorable developments.

With the help of the Zacks Stock Screener, we have zeroed in on five stocks carrying a Zacks Rank #1 (Strong Buy) or 2 (Buy) with the market capitalization of $1 billion or more. Also, these stocks lost more than 20% year to date.

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

Year-to-Date Price Performance

 

Here are the five banks:

Associated Banc-Corp ASB, headquartered in Green Bay, WI, provides an array of banking and non-banking products and services. It provides a full range of financial products and services through 249 banking offices. The company, with a Zacks Rank of 2, has a market cap of $2.6 billion.

Associated Banc-Corp is focused on organic and inorganic growth strategies. Further, the bank has announced branch optimization efforts with an aim to improve operating efficiency through 2021.

Over the past 60 days, the company’s earnings estimates for both 2020 and 2021 have moved 8.1% upward. The stock has lost 22.1% so far this year.

Based in Memphis, TN, First Horizon Corporation FHN is a financial services company. It is the holding company for First Tennessee Bank and FTN Financial. The company has a market cap of $7 billion and sports a Zacks Rank #1.

Apart from focusing on growing its core Tennessee banking franchise, First Horizon is involved in a number of acquisitions. These have helped diversify product offerings, and strengthened its footprint in Carolina and Florida markets. Driven by solid liquidity position, the bank is well poised to grow further through opportunistic buyouts.

Over the past 60 days, the company’s earnings estimates for 2020 have moved 8% upward and the same for 2021 has remained unchanged. The stock has declined 23.5% year to date.

Fulton Financial Corporation FULT is a multi-bank financial holding company that provides banking and financial services to businesses and consumers. Headquartered in Lancaster, PA, the bank operates nearly 220 financial centers.

Driven by solid balance sheet position, Fulton Financial is expected to continue pursuing acquisitions, going forward. Last month, it announced a special dividend of 4 cents per share. In fact, the company has been announcing special dividend annually since 2014.

The bank has a market cap of $2.1 billion. The company’s earnings estimates for 2020 and 2021 have risen 8% and 7.9%, respectively, over the past 60 days. So far this year, the stock has lost 26.1%. The stock sports a Zacks Rank of 1.

Northwest Bancshares, Inc. NWBI, based in Warren, PA, offers various personal and business banking solutions including investment management and trust services, and P&C insurance. It operates 205 full-service community banking offices and eight free standing drive-through facilities in Pennsylvania, New York, Ohio and Indiana. The company has a market cap of $1.6 billion and carries a Zacks Rank #2.

Northwest Bancshares remains focused on improving loan balance. Also, in September, it had announced initiatives to boost branch efficiency. These efforts will make the company’s branches more technology driven and strengthen operating efficiency. Beginning 2021, it projects annual pre-tax operating cost reductions to be nearly $13 million.

The company’s earnings estimates for 2020 and 2021 have risen 12.7% and 8%, respectively, over the past 60 days. So far this year, the stock has lost 23.1%.

Jackson, MS-based Trustmark Corporation TRMK provides banking and other financial solutions to individuals and corporate institutions. The company has 187 branches in Alabama, Florida, Mississippi, Tennessee and Texas. The company, with a Zacks Rank of 1, has a market cap of $1.7 billion.

Trustmark continues to focus on identifying efficiency opportunities and utilize technology solutions to streamline processes and improve the customer experience. These efforts along with solid organic growth will support the bank, going forward.

Over the past 60 days, the company’s earnings estimates for 2020 have moved 29.4% upward and the same for 2021 has risen 21.9%. The stock has declined 20.5% year to date.

Zacks Top 10 Stocks for 2021

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?

These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Start Your Access to the New Zacks Top 10 Stocks >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
First Horizon Corporation (FHN) : Free Stock Analysis Report
 
Fulton Financial Corporation (FULT) : Free Stock Analysis Report
 
Trustmark Corporation (TRMK) : Free Stock Analysis Report
 
Associated BancCorp (ASB) : Free Stock Analysis Report
 
Northwest Bancshares, Inc. (NWBI) : Free Stock Analysis Report
 
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