U.S. banks entered 2013 with uninterrupted expense control,
sound balance sheets, an uptick in mortgage activity and lesser
credit loss provisions. Moreover, a favorable equity and asset
market backdrop, falling unemployment, a progressive housing sector
and a flexible monetary policy have been making the road to growth
Yet top-line growth remains uncertain due to continued sluggishness
in loan growth, pressure on net interest margins from the sustained
low rate environment and less flexible business models owing to
stringent risk-weighted capital requirements (Basel III standard).
However, banks have been gradually easing their lending standards
and trending toward higher fees to dodge the pressure on the top
Moreover, U.S. banks are actively responding to legal and
regulatory pressures, indicating competence to encounter impending
challenges. But the potency of the sector is not expected to return
to its pre-recession peak anytime soon. Economic intricacies, both
domestic and overseas, may even result in some more disappointments
in the upcoming quarters.
Overall, structural changes in the sector will continue to impair
business expansion and investor confidence. Several dampening
factors -- asset-quality troubles, mortgage liabilities and tighter
regulations -- will decide the fate of the U.S. banks in the
quarters ahead. But entering the new capital regime will ensure
long-term stability and security for the industry.
Zacks Industry Rank
Within the Zacks Industry classification, U.S. banks are broadly
grouped in the Finance sector (one of 16 Zacks sectors) and are
further sub-divided into six industries at the expanded level:
Banks-Major Regional, Banks-Midwest, Banks-Southeast, Banks-West,
Banks-Northeast. The level of sensitivity and exposure to different
stages of the economic cycle vary for each industry.
We rank all the 260 plus industries in the 16 Zacks sectors based
on the earnings outlook and fundamental strength of the constituent
companies in each industry. To learn more visit:
About Zacks Industry Rank
As a guideline, the outlook for industries with Zacks Industry Rank
of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral'
and #177 and higher is 'Negative.'
The Zacks Industry Rank for Banks-Southeast and Banks-West is #60,
Banks-Northeast is #84, Banks-Major Regional is #90,
Banks-Southwest is #99 and Banks-Midwest is #213. Considering the
Zacks Industry Rank of the six banking industries, one could safely
say that the near-term outlook for the group is leaning towards
Signs of Improvement
Only a few banks have reported first-quarter 2013 results so far.
Among these, the stupendous performances of a couple of mammoth
JPMorgan Chase & Co.
Wells Fargo & Company
) -- indicate the improved health of the sector, as these two banks
command a significant portion of the U.S. banking market.
Results of these two mega banks show that top line still needs to
improve for assured strength in performance. In addition to their
fundamental strength, the positive developments of the sector and
better macroeconomic elements helped most of the business segments
of these two banks report improved results. Most importantly,
similar to the last couple of quarters, these two banks did not
have to majorly depend on accounting tricks to increase their
Moreover, progress seen in 2012 gives a clear growth indication.
Federal Deposit Insurance Corporation (FDIC)-insured commercial
banks and savings institutions earned $141.3 billion in the year,
up 19.3% from 2011. This is the second-highest level since
reporting earnings of $145.2 billion in 2006.
Besides contraction in provisions for credit losses and cost
containment, marked recovery in the bond and equity markets and
consequent revenue growth helped most of the banks report
higher-than-expected earnings. Expanding consumer credit and
overall improvement in lending activity made it easy for banks to
show steady growth.
In the final quarter of 2012, the industry witnessed substantial
improvement with the institutions reporting 36.9% year-over-year
growth in earnings to $34.7 billion. This marked the 14th straight
quarter of year-over-year earnings increase.
Around 60% of all institutions witnessed year-over-year
improvements in net income during the quarter. Also, the share of
institutions reporting loss slumped to 14.0% from 20.2% a year ago.
Given the solid start by a few mega-banks, the improvement should
further gain ground in the first quarter of 2013.
Fewer Bank Failures and Problem Institutions
During the first quarter of 2013, bank failures have almost
bottomed out with the failure of only 5 FDIC-insured banks. This is
the lowest quarterly tally since the recession started four years
ago (only 2 insured institutions failed in the second quarter of
2008). This compares with 8 bank failures in the fourth quarter of
Moreover, as of Dec 30, 2012, the number of FDIC's "problem
institutions" declined from 694 to 651. As the overall sector
continues to recover, the list of "problem institutions" is
expected to shorten when the FDIC releases the final list for the
first quarter of 2013.
Maintaining Profitability Won't Be Easy
We don't expect reduction in provisions for credit losses to
significantly help earnings growth in the upcoming quarters as the
difference between loss provisions and charge-offs is gradually
Banks will definitely try to look at other areas -- interest
income, non-interest income and operating costs -- to maintain
earnings growth, but there will be limited opportunities given
regulatory restrictions and sluggish economic recovery.
Efforts to cut interest expenses and take additional risks to
improve net interest margins could be marred by a flattening yield
curve. Further, shifting assets to longer maturities for net
interest margin strength could backfire once interest rates start
Conversely, increasing revenues through non-interest sources --
prepaid cards, new fees, higher minimum balance requirement on
deposit accounts and pushing credit cards -- could be hampered by
regulatory actions, economic volatility and soaring overhead.
However, with a rebound in capital market activity, the propensity
to invest in the market increased, which may lead to more
non-interest revenue sources. So, non-interest income can
marginally contribute to the total revenue.
Eventually, banks will have to resort to cost containment through
job cuts and reduced size of operations to stay afloat. So, any
cost-cutting measure will act as a defense. The last four and a
half years saw over half a million banking layoffs, and the story
Balance Sheet Improvement to Take Time
Steady deposit growth from lack of low-risk investment
opportunities post-financial turmoil is quite possible, but high
charge-offs and delinquency rates plus weak demand could keep loan
growth under pressure through the remainder of the year. Though
banks are easing lending standards to accelerate loan growth,
credit quality concerns are likely to mar the effort.
Banks are also trying to address asset-quality troubles by
divesting nonperforming assets, but we don't expect balance-sheet
strength to return anytime soon.
Basel III: A Major Concern
The implementation of Basel III requirements from this year will
boost minimum capital standards. But adjusting liquidity management
processes will cause a short-term negative impact on the financials
of U.S. banks.
This will ultimately make credit costlier and reduce employment.
But a greater capital cushion will help larger banks withstand
internal and external shocks over the long run.
Macro Backdrop Still Uncertain
Though improved economic data such as higher consumer spending and
gross domestic product (GDP), improving housing market and
declining unemployment rate point towards optimism, a paltry
interest-rate environment is disturbing.
The European debt crisis should exacerbate the situation. Though
U.S. commercial banks appear to have significant direct and
indirect exposure to Europe, potential costs are expected to be
manageable. But if the crisis continues, worldwide capital markets
will face a big blow, and the U.S. will not go unscathed.
Though the improving performances by banks seem already priced in
and there remain significant concerns, the sector's performance in
the upcoming quarters is not expected to disappoint investors.
Specific banks that we like with a Zacks Rank #1 (Strong Buy)
Capital City Bank Group Inc.
Crescent Financial Bancshares, Inc.
SCBT Financial Corporation
Columbia Banking System Inc.
Western Alliance Bancorporation
The Bancorp Inc.
Stocks in the U.S. banking universe with a Zacks Rank #2 (Buy)
State Street Corporation
Regions Financial Corporation
Bank of the Ozarks, Inc.
American River Bankshares
First Commonwealth Financial Corp.
Washington Trust Bancorp Inc.
BOK Financial Corporation
QCR Holdings Inc.
The profitability metrics (like returns on equity and return on
assets) are expected to be under pressure. Further, difficulty in
liquidity management due to regulatory restrictions will restrict
Specific banks that we don't like with a Zacks Rank #5 (Strong
Seacoast Banking Corp. of Florida
Synovus Financial Corporation
Sun Bancorp Inc.
BNC BANCORP (BNCN): Free Stock Analysis Report
BOK FINL CORP (BOKF): Free Stock Analysis
CAPITAL CITY BK (CCBG): Free Stock Analysis
COLUMBIA BK SYS (COLB): Free Stock Analysis
CRESCENT FINL (CRFN): Free Stock Analysis
FIRST COMW FINL (FCF): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
BANK OZARKS (OZRK): Free Stock Analysis Report
QCR HLDGS INC (QCRH): Get Free Report
REGIONS FINL CP (RF): Free Stock Analysis
SEACOAST BKNG A (SBCF): Free Stock Analysis
SCBT FINL CP (SCBT): Free Stock Analysis Report
SUN BANCORP/NJ (SNBC): Free Stock Analysis
SYNOVUS FINL CP (SNV): Free Stock Analysis
STATE ST CORP (STT): Free Stock Analysis Report
BANCORP BNK/THE (TBBK): Free Stock Analysis
WESTERN ALLIANC (WAL): Free Stock Analysis
WASH TR BANCORP (WASH): Free Stock Analysis
WELLS FARGO-NEW (WFC): Free Stock Analysis
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