The Trump administration’s deregulatory measures brought much-needed relief to the U.S. banking industry last year. But banking stocks had a torrid time with the KBW Bank Index losing 20% in 2018. Fortunately, the index has staged a recovery this year, gaining 13%, boosted by strong results and substantial payouts to shareholders.
It is now clear that U.S. banks were the biggest beneficiaries of Trump’s tax cuts, with the largest of them shedding $21 billion from their tax bills. Also, for the first time since 2006, not a single bank failed last year. Small banks were among the biggest winners of deregulation and adding them to your portfolio would be prudent now.
Bank’s Reap $21B Tax Bonanza
President Trump’s $1.5 trillion tax cuts helped U.S. banks reduce their tax bills by $21 billion last year. This means that the banking industry benefited more than any other from these reductions.
And financial institutions aren’t just benefiting from a lower tax rate. An incrementally preferential treatment for pass-through companies is another tailwind for the industry. Incidentally, this category of companies largely consists of small banks.
Further, more than 70 banks have declared that they will hike wages or offers higher bonuses in the wake of the tax cut. This includes sector majors like Bank of America (BAC) as well as community banks like Bank OZK (OZK).
And the biggest beneficiaries of tax cuts were shareholders. This is because 23 of the country’s largest banks increased buybacks and dividends by $28 billion from 2017. Further, several of them have secured the Fed’s approval to boost payouts, which means investors are yet to reap the full benefit of these changes.
No Bank Failure in 2018, Small Banks Benefit From Deregulation
Not a single bank failure occurred in 2018, which demonstrates the robust health of the U.S. banking industry. This was the first such year since 2006 and only the third since 1933 that a year elapsed without a bank failure. This was largely attributable to strong economic growth, tax cuts and post-2008 financial rules which boosted bank safety.
And yet small banks have benefited the most from the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act in May last year. Provisions related to mortgage lending, capital and data collection have been relaxed considerably.
This has improved both profitability and efficiency of smaller banking operations. Further, deregulation is unlikely since the House of Representatives is now dominated by Democrats. But regulators retain the power to ease business conditions for banks with smaller operations. On their part, bankers are going easy with daily supervision.
After enduring turbulent times last year, bank stocks are staging a welcome recovery. The impact of tax cuts is finally being felt, with banks set to offer more payouts to shareholders and employees alike. Additionally, the impact of the Trump administration’s deregulatory measures is likely to felt this year as well.
Small bank, tied up by post-crisis era regulations are breathing a sigh of relief. Many of them could be great additions to your portfolio. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.
Atlantic Capital Bancshares, Inc. (ACBI) is the bank holding company for Atlantic Capital Bank, which offers a range of banking products and services.
Atlantic Capital has a VGM Score of A. The company’s projected growth rate for the current year is 27.2%. The Zacks Consensus Estimate for the current year has improved by 4.6% over the last 30 days.
Chemung Financial Corporation (CHMG) is the bank holding company for Chemung Canal Trust Company, which offers a range of banking products and services.
Chemung Financial has a VGM Score of B. The company’s projected growth rate for the current year is 5%. The Zacks Consensus Estimate for the current year has improved 3.4% over the last 30 days.
Middlefield Banc Corp. (MBCN) is the bank holding company for The Middlefield Banking Company, which offers a range of banking products and services.
Middlefield Banc Corp. has a VGM Score of B. The company’s projected growth rate for the current year is 10.7%. The Zacks Consensus Estimate for the current year has improved 6% over the last 30 days.
Summit Financial Group, Inc. (SMMF) is the bank holding company for Summit Community Bank, Inc. which offers a range of banking products and services.
Summit Financial has a VGM Score of B. The Zacks Consensus Estimate for the current year has improved 7.6% over the last 30 days.
Univest Financial Corporation (UVSP) is the bank holding company for Univest Bank and Trust Co. which offers a range of banking products and services.
Univest Financial has a VGM Score of B. The company’s expected earnings growth for the current year is 8.9%. The Zacks Consensus Estimate for the current year has improved 2.8% over the last 30 days.
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, wouldn't you like to know about our 10 finest buy-and-holds for the year?
From more than 4,000 companies covered by the Zacks Rank, these 10 were picked by a process that consistently beats the market. Even during 2018 while the market dropped -5.2%, our Top 10s were up well into double-digits. And during bullish 2012 – 2017, they soared far above the market's +126.3%, reaching +181.9%.
This year, the portfolio features a player that thrives on volatility, an AI comer, and a dynamic tech company that helps doctors deliver better patient outcomes at lower costs.
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Univest Corporation of Pennsylvania (UVSP) : Free Stock Analysis Report
Summit Financial Group, Inc. (SMMF) : Free Stock Analysis Report
Bank OZK (OZK) : Free Stock Analysis Report
Middlefield Banc Corp. (MBCN) : Free Stock Analysis Report
Chemung Financial Corp (CHMG) : Free Stock Analysis Report
Atlantic Capital Bancshares, Inc. (ACBI) : Free Stock Analysis Report
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