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Banks Set for Blockbuster Q1 Earnings: 5 Top Picks

Tirthankar Chakraborty
MGIC (MTG) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

Banks are gearing up to kick-off the Q1 earnings season. Emergence of long-dormant volatility due to trade war tensions, technology industry woes and inflation will certainly drive trading revenues. 

Rising interest rates, for now, will enhance net interest margins, while more confident consumers and a record low jobless rate are sure to boost lending activities. Needless to say, reduction in corporate taxes will boost earnings as banks will be able to retain a larger part of their revenues. Such tax cuts have also stoked a wave of deal signings. Banks should benefit from financing such large mergers and takeovers.

Let us, thus, focus on banks that are likely to make the most of the Q1 earnings season. Such banks are positioned to report upbeat earnings results, which will eventually lead to an uptick in share price.

Volatility Boosts Activity on Trading Floors

The era of calm markets and small swing in prices are almost over. Escalating tariff tensions between the United States and China have raised fears of a full-fledged trade war, while investors fret over data-privacy crisis, setbacks in the self-driving car segment and rise in prices of essential commodities. Wall Street’s fear gauge, the Cboe Volatility Index (VIX), continues to hover above its historic average of 20, while it had jumped 118%, its sharpest rise in record, in February.

A choppier market, however, could well spur trading activities that constitute the bulk of investment bank’s revenues. The Goldman Sachs Group, Inc. GS added that capital market business are projected to grow about 4% year over year, mostly driven by volatility.

Fed Hikes Rates – A Welcome News for Banks

As widely expected, the Federal Reserve raised its benchmark rate by 0.25%, at the conclusion of the FOMC meeting on Mar 21. The central bank projected a steeper path of rate hikes in 2019 and 2020, citing a healthy economic outlook. The vote to lift the benchmark lending rate was a unanimous 8-0. Federal Reserve Chairman Jerome Powell said that the central bank needs to keep raising rates in order to control inflation.

A move toward higher rates is favorable for banks. Needless to say, ultra-low interest rates have weighed on their margins in the last decade. But, this time around higher interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Loans to Grow

U.S. consumer sentiment in March, by the way, reached its highest level since 2004, courtesy of a healthy job market. The sentiment index rose to 101.4 in March from 99.7 in February, per the University of Michigan.

While the unemployment rate remained at a 17-year low of 4.1% in March, workers’ hourly wages rose 8 cents, or 0.3%, to $26.82 in the month. On a year-over-year basis, pay edged up to 2.7%. Although jobs addition in March were a lot less compared to February, the United States added an average of 202,000 jobs a month in Q1, faster than the average gains in the same period of 2017 and 2016.

All these factors will lend consumers the flexibility to borrow more and reduce loan default risks, which bode well for banks.

Tax Reform – A Definite Boost for Banks

The Tax Cuts and Jobs Act passed in December remains a positive for banks this year, per Goldman Sachs. As per the tax overhaul policy, corporate tax rate has been slashed from 35% to 21%. Banks face a high tax burden, which makes them big gainers when tax rates go down. As per KBW estimates, JPMorgan Chase JPM, Wells Fargo & Co WFC and Bank of America Corp BAC will enjoy a 20% or more hike in profits if the corporate tax rate is cut to around 20%.

Goldman further added that such a tax reform could propel overall bank earnings as much as 10% in the near term and return on tangible common equity (TCE) as many as 130 basis points. TCE is widely used to measure a company’s financial strength.

5 Bank Stocks to Buy Heading in to Q1

The aforesaid factors will surely help banks stay afloat this Q1. For the Finance sector, of which the Major Banks industry is the biggest earnings contributor, total Q1 earnings are expected to be up 19.1% from the same period last year on 4.5% higher revenues. This would follow 0.6% earnings growth in the preceding quarter on 4% higher revenues (read more: Bank Earnings Finally Taking Off).

This calls for investing in five banks, which are expected to report a significant uptick in Q1 earnings. These stocks have a positive Earnings ESP — our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. These stocks also flaunt a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Triumph Bancorp, Inc. TBK operates as a financial holding company for TBK Bank, SSB that provides banking and commercial finance products and services to retail customers and small-to-mid-sized businesses in the United States. The company is expected to report earnings results for the quarter ending March 2018 on Apr 18. Triumph Bancorp has an Earnings ESP of +5.58%. The company, which is part of the Banks - Southeast industry, is projected to rally 36.6% in 2018.

Pacific Premier Bancorp, Inc. PPBI operates as the bank holding company for Pacific Premier Bank that provides banking services to businesses, professionals, real estate investors, and non-profit organizations. The company is expected to report earnings results for the quarter ending March 2018 on May 1. Pacific Premier Bancorp has an Earnings ESP of +1.59%. The company, which is part of the Financial - Savings and Loan industry, is expected to gain 59.3% this year.

Commerce Bancshares, Inc. CBSH operates as the holding company for Commerce Bank that provides retail, mortgage banking, corporate, investment, trust, and asset management products and services to individuals and businesses. The company is likely to report earnings results for the quarter ending March 2018 on Apr 12. Commerce Bancshares has an Earnings ESP of +1.57%. The company, which is part of the Banks - Midwest industry, is likely to rally 21.7% in 2018.

PacWest Bancorp PACW operates as the holding company for Pacific Western Bank, a state chartered bank that provides commercial banking products and services. The company is expected to release earnings results for the quarter ending March 2018 on Apr 16. PacWest Bancorp has an Earnings ESP of +1.14%. The company, which is part of the Banks - West industry, is expected to gain 18.8% this year.

Southside Bancshares, Inc. SBSI operates as the bank holding company for Southside Bank that provides a range of financial services to individuals, businesses, municipal entities, and nonprofit organizations. The company is expected to report earnings results for the quarter ending March 2018 on Apr 27. Southside Bancshares has an Earnings ESP of +0.86%. The company, which is part of the Banks - Southwest industry, is expected to rally 31.2% in 2018.

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JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
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