Business restructuring and expansion initiatives, impressive asset quality and digitization are expected to provide additional support. Hence, M&T Bank Corporation MTB, Fifth Third Bancorp FITB and Comerica Incorporated CMA are expected to gain from these favorable industry trends.
About the Industry
The Zacks Major Regional Banks industry includes the nation’s largest banks in terms of assets, with most operating globally. The financial performance of these banks largely depends on the nation’s economic health. As the banks are involved in several complex financial activities, they are required to meet the stringent regulations set by the Federal Reserve and other agencies. Apart from traditional banking services, which are the source of net interest income (NII), major regional banks provide a wide array of other financial services and products to retail, corporate and institutional clients, both domestic and global. These include credit and debit cards, mortgage banking, wealth management and investment banking, among others. So, a large revenue source for these banks is fees and commissions earned from these services.
3 Major Trends Shaping the Future of the Major Regional Bank Industry
Aggressive Fed & Rise in Loan Demand: Major regional banks benefit from higher interest rates. So, the Fed taking an aggressive monetary policy stance to tame raging inflation will support banks’ revenues. It must be noted that banks have been reeling under near-zero interest rates since March 2020, which adversely impacted their net interest margin (NIM) and NII. With the market participants expecting the Fed Funds target rate to reach almost 3% by the end of this year, banks are likely to reap huge benefits with higher NIM and NII. This, along with decent economic growth and higher loan demand, will support banks’ top-line growth.
Business Restructuring Efforts: Major regional banks are taking strategic measures to expand into new avenues and lower their dependence on interest rates. Restructuring of operations is essential for technological advancement and further domestic/global expansion to continue improving profitability. Banks are investing heavily in artificial intelligence and other digital platforms and even partnering/acquiring providers of such services as the demand for these witnessed a substantial rise amid the COVID-19 pandemic. Major regional banks are also aggressively expanding their footprint outside the United States and into the U.K. and China. Banks are re-evaluating their business structure to improve operating efficiency. The main goal is to simplify operations and do away with non-core, unprofitable ones.
Manageable Asset Quality: For the large part of 2020, major regional banks built extra provisions to tide over unexpected defaults and payment delays owing to the economic slowdown resulting from the coronavirus mayhem. This substantially hurt their financials in the first half of 2020. However, with solid economic growth and the government stimulus package, banks began to release these reserves back into the income statement. Yet, given the present macroeconomic and geopolitical concerns, and rise in loan demand, major banks are making provisions to counter any adverse fallout. Nonetheless, a conservative lending policy and resilience of borrowers will help banks’ asset quality to remain strong.
Zacks Industry Rank Indicates Optimistic Prospects
The Zacks Major Regional Banks industry is a 15-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #56, which places it in the top 22% of nearly 253 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since January 2022-end, the industry’s earnings estimates for the current year have been revised 1.1% upward.
Before we present a few stocks that you might want to consider on rising interest rates and other favorable developments, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Major Regional Banks industry has underperformed both the S&P 500 composite and its own sector over the past year. While the stocks in this industry have collectively lost 16.8% over the period, the Zacks S&P 500 composite has declined 6% and Zacks Finance sector has fallen 9.4%.
One-Year Price Performance
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 1.94X. This compares with the highest level of 2.68X, lowest of 1.21X, and median of 2.18X over the past five years. The industry is trading at a huge discount compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 composite is 14.77X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a lower P/TBV ratio, comparing major regional banks with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV came in at 4.13X. This is above the Zacks Major Regional Banks industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
3 Major Regional Bank Stocks to Own Right Now
M&T Bank: With total assets worth $149.9 billion as of Mar 31, 2022, M&T Bank has been expanding through strategic acquisitions. This April, the company completed the buyout of People's United Financial for an all-stock deal valued at $8.3 billion. It is expected to realize cost savings of $330 million by early 2023, with the deal to be accretive to earnings. The acquisition increased M&T Bank’s loans by $36 billion and deposits by $53 billion.
MTB operates as a solid and sustainable regional bank franchise with a footprint that spans six Mid-Atlantic States and DC. This should allow the company to continue generating a decent level of NII in the upcoming quarters with a gradual improvement in the lending scenario and higher rates. Management expects NII on fully tax equivalent (FTE) basis to surge 48-52% this year, depending on the speed of interest rate hikes by the Fed, the pace of deployment of excess liquidity and loan growth.
Also, M&T Bank’s non-interest income recorded a five-year CAGR of 2.7% (2017-2021). While higher rates are expected to put pressure on mortgage originations and gain on sale margins, growth in trust revenues should benefit from the recapture of money market fee waivers sooner than previously anticipated by management. With this, non-interest income is anticipated to increase in the 11-13% range for 2022.
M&T Bank’s capital deployment activities remain impressive. The company has come a long way in displaying its capital strength and hiked its quarterly dividends by 9.1% in November 2021. In February 2022, the board of directors re-authorized the repurchase of $800 million of shares of common stock. The company’s consistent performance and favorable debt/equity ratio when compared with the broader industry indicates that these capital deployment actions seem sustainable.
With a market cap of $30.2 billion, MTB’s efforts to improve revenues and strength in the balance sheet will support financials. Over the past month, the Zacks Consensus Estimate for earnings has remained unchanged for 2022. This Zacks Rank#2 (Buy) stock has gained 7.5% over the past year.
Price and Consensus: MTB
Fifth Third Bancorp: With assets of $211 billion, Cincinnati, HO-based Fifth Third Bancorp has more than 1,079 full-service banking centers across 11 states throughout the Midwestern and Southeastern regions of the United States.
FITB’s efforts to expand on-interest income base over the years with the help of strategic partnerships and acquisitions continue to enhance its digital bank product offering. The acquisitions Dividend Finance in May 2022, Provide in 2021 and Coker Capital in 2020 will support commercial verticals. These are expected to result in revenue growth, expense savings and operational excellence.
This Zacks Rank #2 bank remains focused on branch optimization to enhance its presence in high-growth markets. It closed 40 branches this January, while the company targets to open 25 branches per year through 2025. Thus, Fifth Third Bancorp is re-allocating its branch network to enhance its footprint in the Southeast and lower its presence in the Midwest.
The company’s deposit balances represent an important source of funding and revenue growth opportunity. FITB is well-poised to continue its organic growth supported by a strong pipeline, branch expansions, digital initiatives, new commitment growth, contributions from the acquisitions, economic growth and improving consumer spending trend.
Management expects NII to be up 13-14% (assuming Fed funds rate of 2.50% as of 2022 end) and non-interest income to be stable to down 1%.
A strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting the company’s growth. Also, Fifth Third Bancorp’s sustainable capital deployments reflect a solid liquidity position.
Shares of FITB, which has a market cap of $25.2 billion, declined 11.3% over the past 12 months. The company’s earnings estimates for 2022 have moved 1.7% north over the past four weeks.
Price and Consensus: FITB
Comerica: Headquartered in Dallas, TX, Comerica delivers banking and financial services in three primary geographic markets — Texas, California, Michigan, Arizona and Florida. The company, which has a market cap of $10.1 billion, has operations in numerous other U.S. states, and Canada and Mexico.
Comerica’s focus on improving operational efficiency led to the introduction of GEAR Up initiatives in mid-2016. Since implementing this initiative, the bank has consolidated several banking centers, significantly lowered retirement plan expenses and retrenched a number of employees. These efforts have resulted in an improvement in efficiency ratio and return on equity over time.
Comerica remains focused on revenue growth strategy. With gradually recovering loan commitments, robust loan pipeline and solid economic growth, the company’s loans balance is expected to improve, thereby stoking NII growth.
With interest-rate increases in March and May, management expects NII (including PPP) to grow more than 13% year over year this year. Also, average loans (excluding PPP) are projected to rise in the mid-single-digit range in 2022.
Also, CMA’s capital deployment activities are encouraging and sustainable. In January 2020, it hiked quarterly dividend by 1.5%. In April 2021, the board of directors approved an additional share-buyback plan, with an authorization to repurchase up to an additional 10 million shares. It repurchased 9.5 million shares for $720 million in 2021 and $35 million in the first quarter of 2022.
A manageable debt level, investment-grade long-term credit ratings, solid balance sheet position and impressive credit quality are other catalysts supporting this Zacks Rank #1 stock. Over the past year, CMA gained 1.3%. Analysts are also optimistic about the stock. The Zacks Consensus Estimate for 2022 earnings has been revised 3.9% upward over the past 30 days.
Price and Consensus: CMA
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