The pessimism surrounding the financial markets indicates a weak first-quarter earnings season ahead for the banks. Revenue and earnings growth has become uncertain on heightened market volatility which has resulted in weak investment banking and capital markets activity.
Moreover, decline in commodity prices, weak emerging markets, restricted business and consumer spending, rate hike uncertainty and tumbling energy prices have added to the woes. Further, the benefit from reserve releases is gradually fading with a significant run down of reserves for the majority of banks.
Pushed to the wall, banks have exploited every cost-saving opportunity to improve their bottom-line performance.
On the investment banking front, according to Thomson Reuters data, global investment banking fees declined 29% year over year, with the U.S. recording a 32% decline due to reduced M&A activities. Moreover, the equities division expects a slowdown due to cautious steps taken by investors amid uncertainties surrounding global economies and the timing of the next domestic interest rate hike.
The past few years were tough for banks' mortgage business due to a strict regulatory environment. While a low-rate environment encouraged people to refinance home loans, commercial banks witnessed sharply declining fresh originations. Further, low margin on fresh mortgages due to low rates and a rise in nonbank lenders made mortgage business miserable.
However, with the imminent rate hike cycle, significantly low unemployment rate and continued improvement in the housing market, the mortgage rate and fresh origination volume should rise. But energy sector lending is expected to remain weak given the wild swings in oil prices .
Though banks might fail to keep the tradition of rallying into a new rate hike cycle this time around, their performance may not be as bad as it was during the drawn-out low-rate environment. Rising interest rates will not only lift banks' bottom lines through spread expansion, but will also help them earn incrementally from the money they need to keep at the Fed.
Further, supportive macroeconomic elements will minimize default rates on loans. Banks will also see increased demand for mortgage loans, car loans and other consumer loans with improving economic conditions.
Despite the rise in loan demand, the top line will continue to remain under pressure due to the impact of the still low rate environment on net interest income.
Further, non-interest income will likely be hit by a slump in trading revenues, as ambiguity over several global and domestic issues kept investors away from the markets. Though trading activities picked up slightly in March, it failed to offset the declines recorded in the first two months of the quarter.
The broader finance sector, of which banks constitute a major part, is expected to disappoint in the first quarter, with earnings expected to decline 10.7% year over year. This compares unfavorably with 0.5% growth witnessed in the prior quarter. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Preview report).
This is perhaps the right time to add some beaten down banking stocks that are poised to surprise in their upcoming announcement.
The Way to Pick the Right Stocks
Picking the most rewarding stocks within the industry might be a difficult task unless one knows the way to narrow down the list. One way to do that is by choosing stocks that have the combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Earnings ESP .
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with 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%.
Here are five major banking stocks that have the right combination of elements to deliver positive earnings surprises in their upcoming announcements:
MB Financial Inc. ( MBFI ) has an earnings ESP of +1.96% and carries a Zacks Rank #3. It is scheduled to report first-quarter results on Apr 18.
The earnings ESP for PrivateBancorp, Inc. ( PVTB ) is +1.75% and it carries a Zacks Rank #3. The company is expected to release first-quarter results on Apr 21.
Simmons First National Corporation ( SFNC ) has an earnings ESP of +1.30% and carries a Zacks Rank #3. It is scheduled to report first-quarter results on Apr 21.
The earnings ESP for Banc of California, Inc. ( BANC ) is +9.38% and it carries a Zacks Rank #1. The company is expected to release first-quarter results on May 4.
Fidelity Southern Corporation ( LION ) has an earnings ESP of +2.86% and carries a Zacks Rank #2. It is scheduled to report first-quarter results on Apr 21.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
MB FINANCL INC (MBFI): Free Stock Analysis Report
PRIVATEBANCORP (PVTB): Free Stock Analysis Report
SIMMONS FIRST A (SFNC): Free Stock Analysis Report
BANC OF CA INC (BANC): Free Stock Analysis Report
FIDELITY SOUTHN (LION): Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
