Banks that have reported second-quarter 2020 results so far have recorded significantly higher provisions, owing to the continued uncertainty related to the impact of the coronavirus pandemic on the economy. This along with lower interest rates has affected earnings growth to an extent.
Since the beginning of this year, banks have remained in the spotlight. Because of the lockdown, business activities came to a grinding halt in the last few weeks of the first quarter. While companies have started resuming work of late, overall business activities still remained weak during the second quarter because of continued fears related to the pandemic and economic slowdown.
Hence, the overall lending scenario was also not very impressive during the second quarter. While commercial and industrial loans offered significant support, demand for consumer loans remained muted. Hence, overall loan growth is expected to have been soft.
Thus, because of muted growth in loans along with near-zero interest rates, banks’ interest income growth and net interest margins (one of the key metrics for gauging profitability) are expected to have been negatively impacted to a great extent.
Now, coming to investment banking performance; with the coronavirus pandemic continuing to wreak havoc, deal-making went for a toss in the second quarter. Hence, banks are expected to have recorded a fall in advisory revenues.
However, while IPO activities were muted in the quarter, there was a substantial rise in follow-up equity issuances because companies tried to build liquidity to tide over the pandemic crisis. Also, amid near-zero interest rates and the Federal Reserve’s bond purchase program, bond issuance volumes were strong as companies took this as an opportunity to bolster their balance sheets. Thus, underwriting fees are expected to have witnessed growth.
Further, while growth in mortgage originations remained muted in the second quarter, refinancing activities improved significantly, owing to historically-low mortgage rates. Thus, this is expected to have supported banks’ mortgage banking businesses.
On the trading front, similar to the first quarter, the second quarter saw significant market volatility along with higher client activity. Hence, banks’ trading revenues are expected to have improved in the second quarter, thereby, aiding top-line growth.
On the cost front, with almost everybody working from home, banks are expected to have recorded a decline in overhead expenses in the second quarter. Nonetheless, with the increase in the use of virtual mediums for communication and other business activities, technology costs are expected to have increased to some extent. Overall, costs are expected to have been manageable in the second quarter.
In the S&P 500 universe, the Zacks Finance sector’s total earnings, of which banks account for a major part, are projected to decline 44.7% year over year in the second quarter. This is worse than 33.1% fall recorded in first-quarter 2020.
(For a detailed look at the earnings growth projections for this industry and others, please read our Earnings Outlook article.)
Selecting Potential Winners
Despite the somewhat weak outlook for the banking sector, we have selected some banking stocks that are well-positioned to beat earnings estimates in their upcoming releases.
Choosing stocks with earnings beat potential might be a difficult task unless one knows the process to shortlist. One way to do it is by picking stocks that have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
5 Banks Poised for Earnings Surprises
Here are five bank stocks that have the right combination of elements to deliver earnings surprises in their upcoming announcements:
Commerce Bancshares, Inc. CBSH has an Earnings ESP of +4.90% and a Zacks Rank of 3. It is slated to report results on Jul 21.
Associated Banc-Corp ASB is set to report second-quarter earnings on Jul 23. The company currently has an Earnings ESP of +7.31% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Earnings ESP for SVB Financial Group SIVB is +6.71% and it carries a Zacks Rank of 3 at present. The company is scheduled to release quarterly figures on Jul 23.
East West Bancorp, Inc. EWBC is also scheduled to release results on Jul 23. The company, which currently carries a Zacks Rank of 3, has an Earnings ESP of +3.47%.
The Earnings ESP for Cullen/Frost Bankers, Inc. CFR is +6.27% and it has a Zacks Rank of 3 at present. The company is set to report quarterly numbers on Jul 30.
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Commerce Bancshares, Inc. (CBSH): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.