What's in Store for U.S. Banks in 2013?
U.S. banks look ready for 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, progressive housing sector and an accommodative
monetary policy are expected to make the road to growth smoother.
Yet, a favor from top-line growth still remains uncertain due to
expected sluggishness in loan growth, pressure on net interest
margin from the sustained low rate environment and less flexible
business model owing to stringent risk-weighted capital
requirements (Basel III standard).
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 year
ahead. But entering the new capital regime will ensure long-term
stability and security for the industry.
Clear Signs of Improvement
Progress seen in the first three quarters of this year gives a
clear growth indication. 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 continued improvement.
The third quarter in particular showed exceptional top-line growth.
Revenue growth was the best since 2009 buoyed by solid growth in
mortgage revenue. Most importantly, for the first time in almost
three years, banks did not have to majorly depend on accounting
tricks for increasing earnings, thanks to strong top-line growth.
Federal Deposit Insurance Corporation (FDIC)-insured commercial
banks and savings institutions reported third-quarter earnings of
$37.6 billion, outpacing year-ago earnings of $35.2 billion by
nearly 6.6%. This marked the 13th straight quarter of
year-over-year earnings increase.
More than half (57.5%) of all institutions witnessed year-over-year
improvements in net income during the quarter primarily on improved
top lines and reduced loan loss provisions. Major banks earned
nearly 82.0% of the total third-quarter profit. These include
mammoth players like
JPMorgan Chase & Co.
Wells Fargo & Company
), which commands a significant portion of the U.S. banking market.
The Zacks Consensus Estimate for JPMorgan is earnings of $1.22 per
share for fourth quarter and $5.01 for full year 2012. Wells Fargo
is expected to earn 89 cents per share in the fourth quarter and
$3.35 in the full year. For 2013, earnings of JPMorgan and Wells
Fargo are expected to increase 5.8% and 7.9% to $5.30 and $3.61 per
share, respectively, indicating significant improvement in the key
banking sector in 2013.
Fewer Bank Failures and Problem Institutions
During the third quarter, only 12 FDIC-insured banks failed -- the
least in a quarter since fourth quarter 2008. As of December 14,
2012, the tally of failed banks came in at 51 compared with 90 in
the year-ago period.
Moreover, as of September 30, 2012, the number of FDIC's "problem
institutions" declined from 732 to 694, which is the lowest since
third quarter 2009.
Achieving 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 opportunity given the
expected weakness in lending activity due to regulatory
restrictions, sluggish economic recovery and the so-called fiscal
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 encouraging credit cards - could be hampered
by regulatory actions, economic volatility and soaring overhead.
So, non-interest income can only marginally contribute to total
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 years saw
about half a million banking layoffs, and the story
What QE3 and "Fiscal Cliff" Mean for Banks?
While the quantitative easing or QE3 effort of the central bank is
expected to stimulate loan demand, wholesale recovery in lending
activity is unlikely with memories of recession and job loss
keeping customers away. But, QE3 will definitely help banks with
respect to generating loans to some extent.
Then again, if the U.S. steps off the fiscal cliff, which enforces
tax hikes and spending cuts, interest rates will remain low and net
interest margin will fail to improve. Also, likely changes in the
capital gains tax due to fiscal cliff will sidetrack many
businesses from loans.
Balance Sheet Recovery 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 next year.
Banks are trying to address asset-quality troubles by divesting
nonperforming assets, but we don't expect balance sheets strength
to return anytime soon.
Basel III: A Major Concern
The implementation of Basel III requirements from 2013 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. Also, uncertainty over
fiscal cliff could keep economic growth tardy.
The European debt crisis will exacerbate the situation. Though the
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 deepens, worldwide capital markets
will face a big blow, and the U.S. will not be left unscathed.
Though the improving performance of banks seems already priced in
and there remains substantial concerns, the sector's performance in
the upcoming quarters should not disappoint investors.
Specific banks that we like with a Zacks #1 Rank (short-term Strong
Buy rating) include
ViewPoint Financial Group
Cardinal Financial Corp.
M&T Bank Corporation
Macatawa Bank Corp.
Tompkins Financial Corporation
Stocks in the U.S. banking universe with a Zacks #2 Rank
(short-term Buy rating) currently include
BOK Financial Corporation
Texas Capital BancShares
Central Pacific Financial
Fidelity Southern Corporation
First Business Financial Services
Washington Trust Bancorp
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
There are currently four stocks with a Zacks #5 Rank (short-term
Strong Sell rating). These are
Bank of Marin Bancorp
CVB Financial Corp.
Porter Bancorp Inc.
State Bank Financial Corporation
Park National Corp.
BOFI HLDG INC (BOFI): Free Stock Analysis
CARDINAL FINL (CFNL): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
MACATAWA BANK (MCBC): Free Stock Analysis
M&T BANK CORP (MTB): Free Stock Analysis
PREFERRED BANK (PFBC): Free Stock Analysis
TEXAS CAP BCSHS (TCBI): Free Stock Analysis
TRICO BANCSHRS (TCBK): Free Stock Analysis
TOMPKINS FIN CP (TMP): Free Stock Analysis
WELLS FARGO-NEW (WFC): Free Stock Analysis
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