The U.S banking industry, which has witnessed a solid rally since the beginning of the year with investors’ optimism over President Trump’s policy reforms and rising interest rates, seems to have lost momentum recently.
Lack of any tangible progress on the promises made by Trump and uncertainty related to the pace of interest rate hikes in the future are primarily responsible for the recent dislike of investors for this space.
Further, the expectation of the industry witnessing declining mortgage banking and trading revenues in the upcoming quarter has sidelined hopes of top-line recovery.
Finally, lower-than-expected easing in banks’ margin pressure despite the three rate hikes since last December is discouraging investors to bet on the industry. Though a rising rate environment is favorable for the banking system, lenders have not been able to generate revenues due to uneven movements in short and long-term rates.
Which Segment Suffered Most?
Given the challenging environment, Zacks medium level bank industry, Banks & Thrifts, has declined 6.8% year to date, significantly underperforming the S&P 500’s rally of 11.6%.
Despite this price decline, the banks in this group seem overvalued when compared with the broader Zacks Finance Sector. Banks & Thrifts have a price-to-book ratio of 1.82 compared with 1.54 for the broader market.
3 Stocks That Might Not Rally Further
We have selected stocks that have gained more than 20% so far this year, but have been witnessing a downward trend in earnings estimate revisions and carry a Zacks Rank #4 (Sell) or #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
CommerceWest Bank CWBK: The stock has gained nearly 26% year to date. The Irvine, CA-based company has a Zacks Rank of 4. Further, its Zacks Consensus Estimate for the current-year earnings has been revised 5.5% downward over the last 60 days.
DNB Financial Corporation DNBF: Shares of this bank have gained 20.1% year to date. However, its Zacks Consensus Estimate for the current-year earnings has been revised 10.41% downward over the last 60 days. The Downingtown, PA-based bank carries a Zacks Rank of 5.
FVCBankcorp, Inc. FVCB: Shares of this bank have gained 25% so far this year. Its Zacks Consensus Estimate for the current-year earnings has been revised 1.9% downward over the last 60 days. This Fairfax, VA-based lender carries a Zacks Rank of 4.
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