watch the videoRegional banks could offer some opportunity to investors rotating out of growth stocks: Wiley
Why Are Bank Stocks Doing So Well in 2021?
Financial stocks are extending an already sizable 2021 rally as the country's biggest banks post strong third-quarter earnings, thanks to a hot market for best regional bank stocks deal-making and an economic recovery that led to fewer bad loans than they had expected during the height of the pandemic.
In recent days, heavyweights like JPMorgan Chase(JPM) and Bank of America(BAC) solidly beat earnings expectations for the third quarter. Bank of America, along with Wells Fargo (WFC), is up more than 7% since reporting visa costco citi login this strong earnings backdrop, for six of the largest banks, Morningstar analysts have raised their estimates of the stocks' value.
This has played out in strong gains for bank-heavy financial exchange-traded funds such as iShares U.S. Financial Services ETF (IYG)--whose top holding is JPMorgan--which has rallied 6.2% since Sept. 19 and is up 33.5% so far in 2021. IShares U.S. Regional Banks ETF (IAT) has gained 9.8% over the past month and 41.2% year to date. Meanwhile, the Morningstar US Large-Mid Cap Index is up just 1.3% in the past month and 20.1% in 2021.
Financials, broadly, have been the second-best-performing sector in the U.S. stock market in 2021, lagging only energy stocks, which surged on the back of higher oil prices. Financials were far behind in 2020, weighed down by concerns about the impact of the pandemic-driven recession as lenders marked down loan portfolios in anticipation that large numbers of borrowers would be unable to make their payments.
The latest leg up for financials has come following third-quarter earnings.
One factor giving a boost to bank profits has been the reversal how to get free gift card for google play store 2020's loan-loss reserves set aside amid the recession. When banks set aside provisional cash indigo credit card customer service email cover any loans that go bad, two things can happen to these reserves: Best regional bank stocks loans are repaid, the reserves get added back to the balance sheet as earnings, and if loans go bad, the reserves get converted to losses in the form of net charge-offs. This quarter, Bank of America was at a 50-year low for net charge-offs, according to Morningstar senior equity analyst Eric Compton.
While that 2020 headwind has turned into a tailwind, Compton thinks the loan-loss reserves story is now nearly played out. "It's hard to tell exactly, but I'd say banks are about 80% done releasing the loan-loss reserves," he says. "You'll see a few small reserve releases, I think, for the next several quarters. However, they won't be nearly as large as what we've witnessed in the first half of 2021."
While the reversal of loan-loss reserves had largely been predicted for this year, an unexpected boost to profits has come from fees earned in a booming mergers and acquisitions market, along with a strong pipeline of initial public offerings, including special-purpose acquisition companies, or SPACs.
That, of course, has benefited traditional investment banking firms, such as Goldman Sachs (GS), which financial-services equity research director Michael Wong notes had its second-best quarter in its history with financial advisory and wealth management services reaching record revenue levels.
But the big diversified banks have also benefited from their investment banking operations. Eric Compton points to JPMorgan, which generally has earned between $500 million and $700 million per quarter in advisory-related fees. In the most recent quarter, JPMorgan pulled in $1 billion. Compton notes a similar story at Bank of America, which earned just over $600 million in advisory fees in the third quarter, up from a typical range of $200 million to $400 million.
Morningstar analysts expect the high-volume fee environment to hold up. "Investment banking shows no sign of letting up," explains Compton.
One potential positive for banks going forward are rising interest rates, which translate into higher net interest margins--essentially the difference between what banks can lend versus the cost of borrowing. "The yield environment is still not as strong as it could be for banks," says Compton. "We have recovered from July and August's lows, but the federal-funds rate hasn't gone up yet. We expect the federal-funds rate to rise in late 2022."
The downside for investors looking to put money to work in financial stocks is that thanks to this year's rally, opportunities to find undervalued banks are scarce. Just three U.S. banks on the Morningstar's coverage list are currently trading at 4- or 5-star prices: Wells Fargo, Citigroup (C), and Huntington Bancshares (HBAN).
Here's a look at Eric Compton's take on the largest U.S. banks.
"Wide-moat JPMorgan reported excellent third-quarter earnings, beating the FactSet consensus estimate of $3.00 per share with reported earnings per share of $3.74. The bank once again benefited heavily from reserve releases, which totaled roughly $2 billion this quarter. Excluding the release of reserves, EPS was closer to $3.03, and the bank's return on tangible common equity was closer to 18%. As we had expected, reserve releases are slowing down, and the latest release gets the bank pretty best regional bank stocks to our estimate of 'normalized' reserve levels. Although we believe that there are potentially more reserves for the bank to release, we think it might be less than $1 billion that remains on JPMorgan's books.
"Management essentially left its high powered bb gun guidance unchanged, with the main update being a decrease in expected card net charge-offs to 2.0% for the year from 2.5%. After updating our projections, we are increasing our fair value estimate for the bank to $149 per share from $143. This change was driven by time value of money (roughly $2), lower expected credit costs, and higher fees."
Bank of America
"Wide-moat Bank of America recorded solid third-quarter earnings, beating the FactSet consensus EPS estimate of $0.71 with a reported EPS of $0.85. Like peers, Bank of America is seeing historically strong credit quality as net charge-offs fell to 20 basis points of average loans--a 50-year low. Asset improvements led to a provision benefit of $624 million and a $1.1 billion release in reserves. Credit wasn't the only item that outperformed our expectations, as wealth management and investment banking fees came in ahead of our projections.
"The bank also seems poised to reach its goal of gaining an additional $1 billion in its quarterly net interest income run rate by the fourth quarter, which we thought the bank might miss. After increasing our net interest income and fee projections, bank of montreal number are increasing our fair value estimate to $38 per share from $35."
"Wide-moat Wells Fargo reported middling third-quarter earnings. While the bank exceeded the FactSet consensus estimate of $1.00 per share with reported EPS of $1.17, we think the outlook for expenses and net interest income was a bit soft. Even after excluding the $250 million charge related to recent issues with the Office of the Comptroller of the Currency, the bank's expenses came in a bit above our expectations. Management attributes a good chunk of this to higher revenue, and indeed, fees and salary expenses were two key items that came in above our expectations.
"Management was reticent to give any guidance for 2022 and instead deferred to next quarter's call. Net interest income was also a bit weak, and we expect it to come in at the very bottom of management's previous guidance of down 0% to 4%. The one bright spot was fee growth, with investment banking, wealth, mortgage, and service fees all exceeding our expectations, a pattern we have seen with peers as well."
"Narrow-moat Citigroup reported decent third-quarter earnings, easily beating FactSet consensus EPS of $1.71 with reported EPS of $2.15. The bank benefited from a provisioning benefit once again, as credit costs remain nonexistent. Charge-offs have been exceptionally low for the industry this quarter, and Citi's card balances have also fallen substantially, further helping to lower the bank's credit costs. Expenses continued to build, up 3% over last quarter as the bank continues to invest in its back-end and regulatory initiatives. Revenue would have been up roughly 2% if not for the estimated $680 million loss on the bank's sale of its consumer operations in Australia. It's good that the bank is pruning some of its less successful operations, but this serves as a reminder of some of the bad investments the bank has made over the years.
Disclosure: Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Neither Morningstar, Inc. nor its investment management division markets, sells, or makes any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.
Best Bank ETFs for Q1 2022
Bank exchange-traded funds (ETFs) offer investors exposure to the banking and financial sector of the economy. Banking services can range from taking deposits, making loans, and facilitating payments to investment management, retirement planning, insurance, and brokerage services. Aside from charging fees for these services, banks earn profits by charging higher interest rates on the loans they make than the rates they pay on their customers’ deposits.
Bank ETFs offer a way for investors to share in these profits by investing in a basket of banks and other financial-services companies.
- The banking sector dramatically outperformed the broader market over the past year.
- The bank exchange-traded funds (ETFs) with the best one-year trailing total returns are FTXO, KBWB, and KRE.
- The top holdings of these ETFs are Popular Inc., Bank of America Corp., and class A shares of Silvergate Capital Corp., respectively.
Seven distinct bank ETFs trade in the United States, excluding inverse and leveraged funds as well as those with less than $50 million in assets under management (AUM). The banking sector, as measured by the S&P 500 Banks Industry Index, has outperformed the broader market with a total return of 54.1% over the past 12 months compared to the S&P 500’s total return of 31.5%, as of Nov. 16, 2021.
The best-performing bank ETF, based on performance over the past year, is the First Trust Nasdaq Bank ETF (FTXO). We examine the three best bank ETFs below. All numbers below are as of Nov. 12, 2021.
First Trust Nasdaq Bank ETF (FTXO)
- Performance Over One-Year: 70.1%
- Expense Ratio: 0.60%
- Annual Dividend Yield: 1.52%
- Three-Month Average Daily Volume: 86,903
- Assets Under Management: $291.0 million
- Inception Date: Sept. 20, 2016
- Issuer: First Trust
FTXO tracks the Nasdaq US Smart Banks Index, which selects the 30 most liquid U.S. bank securities from the Nasdaq US Benchmark Index and then ranks them based on volatility, value, and growth factors. The ETF is fairly concentrated in the largest names, with the 10 top holdings accounting for about 58% of invested assets.
The top positions in the fund’s portfolio include Popular Inc. (BPOP), which operates as Popular Bank or Banco Popular on the U.S. mainland, and in Puerto Rico and the Virgin Islands; PNC Financial Services Group Inc. (PNC), a super regional bank that offers a range of banking and financial services; and JPMorgan Chase & Co. (JPM), the largest U.S. bank holding company, which offers investment banking and financial services.
Invesco KBW Bank ETF (KBWB)
- Performance Over One-Year: 67.1%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 1.79%
- Three-Month Average Daily Volume: 1,438,861
- Assets Under Management: $3.6 billion
- Inception Date: Nov. 1, 2011
- Issuer: Invesco
KBWB tracks the KBW Nasdaq Bank Index, a Nasdaq index targeting companies primarily engaged in U.S. banking activities. The ETF invests in stocks that comprise at least 90% of the index. Companies in the KBWB portfolio include large national U.S. money centers, regional banks, and thrift institutions that are publicly traded in the United States. KBWB tends to have a larger proportion of small-cap companies in its portfolio than other bank ETFs.
KBWB’s top 10 holdings account for just under 60% of its invested assets. Its top three holdings are Bank of America Corp. (BAC), one of the biggest U.S. bank holding companies, offering investment banking and financial services; Wells Fargo & Co. (WFC), a major U.S. bank offering diversified financial services; and U.S. Bancorp (USB), a super regional bank holding company.
SPDR S&P Regional Banking ETF (KRE)
- Performance Over One-Year: 66.6%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 1.87%
- Three-Month Average Daily Volume: 8,300,032
- Assets Under Management: $5.5 billion
- Inception Date: June 19, 2006
- Issuer: State Street
KRE tracks the S&P Regional Banks Select Industry Index, representing the regional banks segment of the S&P Total Market Index. The fund's target index is comprised of regional bank stocks, ranging in size from small cap to large cap. Because of its focus on regional banks, KRE contains a higher proportion of small-cap and mid-cap bank stocks than many other bank ETFs. The fund is well-diversified, with the top 10 holdings accounting for roughly 22% of invested assets.
The top holdings of KRE include class A shares of Silvergate Capital Corp. (SI), a bank providing financial services to businesses in the fintech and cryptocurrency industries; SVB Financial Group (SIVB), a provider of private banking and wealth management services; and Western Alliance Bancorp (WAL), a regional bank.
The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.
Bank stocks are still a big gamble, so don't rush in
-- You normally think of a bank president as a guy in a teak-paneled office, lighting a Cuban cigar with a $50 bill before his 3 o'clock tee time. These days, however, you're more likely to see him tapping open his fourth pack of unfiltered cigarettes and popping Valium while watching the parking lot for agents from the Federal Deposit Insurance Corp.
And who could blame him? Bank stocks, by many measures, are very cheap indeed. If we accept the notion that it's better to buy stocks when they are cheap, then shouldn't we be buying bank stocks by the bushel? In a word, no. While there may be a few bank stocks worth buying now — and we'll get to those in a bit — by and large, the banking sector has another act or two of its long tragedy to play out.
As you've probably noticed, things have gone horribly wrong in the banking system. Banks made a number of loans to borrowers with poor credit ratings, hoping that the higher mortgage rates they charged would offset the higher defaults that go hand-in-hand with subprime lending. They were mistaken.
Soaring loan defaults have forced banks to slash or cut dividends and write down the value of their contra costa county health department portfolios.
Wall Street takes a dim view of these things, and bank stocks have been clobbered. Citigroup, the nation's largest bank, has seen its stock tumble 68% the past 12 months. The Dow Jones U.S. select regional bank index has tumbled 48%. And Freddie Mac and Fannie Mae, which package mortgages and sell them to investors, have fallen 87% and 79%, respectively.
If you've been around long enough, you know that things go terribly wrong in the banking industry with depressing regularity. In the early 1990s, for example, the government bailed out the banking industry to the tune of more than $1 trillion because of ill-advised real estate loans. In the early 1980s, many banks took huge losses because of best regional bank stocks ill-advised loans in the Texas and Oklahoma oil patch, as well as to Latin America.
And, unfortunately, bank stocks don't usually form a neat bottom and then rebound smartly. They extend their chase bank account closing fee for a long period.
Initially, officials at a troubled bank will disclose a few bad loans and say that the worst is over. The next quarter, they will disclose a few more, adding that they have no plans to cut the dividend. Eventually, they cut the dividend. Afterward, perhaps, they issue more stock to raise capital. (Issuing more stock, by the way, is called "watering the stock" on Wall Street, because when you issue more shares, you dilute the value of existing shares.)
In the best case, the stock languishes for years until its numbers actually show some improvement. In the worst case, you get a notice from the FDIC, saying that your bank has a new name and, incidentally, your stock is worthless.
We're still at the point where banks are largely denying their troubles, says David Ellison, manager of the FBR Large-Cap Financial Fund. "You can't trust or believe anyone," Ellison says.
For example, Bank of America bac paid a dividend of 64 cents a share in April: Multiply that by four and you get a $2.56 annual dividend payout per share. At the stock's current price, that's an 11.61% dividend yield — either astonishingly generous or ripe for a cut, depending on your point of view.
Bank of America CEO Ken Lewis told the Los Angeles Times Wednesday: "Given our view of things, we do not expect to cut the dividend, nor do we expect to have to blackberry key2 le t mobile capital."
Ellison has doubts. "Their annual dividend payout is more than $10 billion. I think they could use that $10 billion right now," Ellison says.
Anton Schutz, manager of Burnham Financial Industries fund, says that a bank's capital level — that is, the amount of money available through investors and retained earnings — is the most important consideration for investors now. "Capital is king," he says. Banks that have enough capital will be able to make loans and investments. "Those who need capital are in a death spiral."
Schutz has a few favorite well-capitalized banks, all of which his fund owns, incidentally. One is People's United Financial pbct, a Connecticut bank; another is Investors Bancorp isbc, holding company for a New Jersey savings bank. But they're admittedly rare.
If you're exceptionally brave, you might consider tiptoeing into a financial services fund. But you have to be patient. Ellison has 50% of his portfolio in cash. "I'm not afraid to miss the bottom," Ellison says. "Once we hit the bottom, it's not going to get better in two months. It will get better over a couple of years." In the meantime, he figures, it's best to play it safe.
John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. Click here for an index of Investing columns. His e-mail is [email protected]
Best Regional Banks
If you’re looking at opening a new bank account or move your existing accounts to a new bank, regional banks are something that might have come up on your radar.
These types of banks have some advantages over other types of banks. There also are several things that you need to look out for to ensure that your experience remains a positive one.
This article will explain what regional banks are, what they offer, and look at some of the top regional banks available hudson river bank and trust Best Regional Banks of 2021
Here’s a list of the top 5 regional banks available across the country.
- Bancorp South
- BBVA USA
- Fifth Third Bank
- PNC Bank
Bancorp South (not to be confused with US Bancorp) is a southern bank that first started operating out of a hardware store best regional bank stocks 1876.
While they started servicing Tupelo customers, they grew through several mergers and acquisitions, extending their reach to what it is today.
Through their personal banking arm, they offer many deposit accounts, including checking and savings accounts.
They also provide loans, credit cards, and wealth management services. Bancorp South also offers its customers online banking as well as mobile banking.
BBVA USA is a regional bank with a strong presence in the south. They are considered one of the best regional banks, and their accounts regularly feature in lists of best bank accounts.
The bank services both individual customers and small businesses as well as commercial entities. They also offer global wealth best regional bank stocks to help customers reach their goals.
BBVA offers several checking and savings accounts on the personal banking side, including free checking accounts. Other products and services on offer include credit cards, loans, mortgages, and investments.
BBVA also offers many special programs designed for students, medical professionals, military and law enforcement personnel, students, and several other special benefits and perks.
Fifth Third Bank
Fifth Third Bank is a regional bank servicing Midwestern and Eastern clients.
In March of 2020, Fifth Third Bank was sued by a federal regulator for alleged fraudulent activity in which bank employees opened unauthorized accounts to meet their sales target. In February 2021, the bank also settled the high ATM fees it charged customers.
That aside, the bank services individuals, businesses, and corporations. Their Momentum Banking account comes with no hidden fees, fraud protection and even allows you to get access to your pay. However, this is against a fee.
Fifth Third also offers loans and mortgages, investment options, as well as insurance.
PNC is a regional bank with a presence in some 21 different states, making it one of the larger regional banks.
Just like other banks, they serve several different customers with many innovative products and services. They recently acquired BBVA USA, which we covered earlier in this article.
While they offer traditional bank accounts such as checking accounts and savings accounts, they also have Virtual Wallet, which combines tools for managing your money with a checking and savings account. They also offer banking services for students and military personnel with special packages available.
Their website also features an extensive learning section, with many topics available to help visitors learn more about personal finance.
Headquarters: North Carolina
Truist Bank is the product of a merger between two banks – BB&T and SunTrust. The bank operates in 15 states and Washington, DC.
At the moment, you cannot open an account directly with Truist – instead, you will need to go either through BB&T or SunTrust.
Once the merger completes and systems undergo consolidation, any account held with these two banks will become a Truist account.
While most of the bank’s products and services are still under wraps, the bank has started releasing information about what we can expect, including Truist Momentum – a financial wellness program that employers can offer to their employees.
The program is offered at cost and has already seen some positive results.
Other Top Regional Banks Reviewed
What Is A Regional Bank?
A regional bank is, for all intents and purposes, a bank. In most cases, the only difference is that they operate in a specific area and do not service customers nationwide.
Regional banks sit between community banks and national banks. While the term national bank technically means any bank that operates within a regulatory structure, it can also mean a bank with operations, such as branches and ATMs across the nation.
Regional banks, on the other hand, while they are technically speaking national banks, only service select areas that can best regional bank stocks from a few counties to a handful of states. In a way, their business model first bank of wyoming lovell wy similar to that of credit unions.
As regional banks are bigger than community banks, they tend to offer a wider selection of best regional bank stocks and services. Yet, they are still able to provide a more personalized service, which is something that the big banks often lack.
The term big banks can be pretty confusing since most banks are rather big. However, some banks, such as the Big Four banks, can be considerably bigger. These include:
They have branches and ATMs across the entire US, unlike regional banks who tend only to service specific areas.
What Products Do Regional Banks Offer?
In most cases, you’ll find all of the products and services typically offered by the bigger banks.
However, this is a generalization since nothing binds regional banks from providing one service and not the other. Regional banks can also vary a lot in size, which can limit what they offer.
You should find many different deposit accounts, including:
Most regional banks, especially the bigger ones, will also offer debit cards, credit cards, loans, mortgages, and other financial products and services.
Features of Regional Banks
As we discussed, regional banks have many, if not all, of the features and banking services you find at any other bank.
It is still important to check if the bank has all of the features and perks you need.
Here are some things to keep online trading brokerage firm mind when looking at regional banks to open your bank account.
- Branches: Regional banks tend to have a limited number of branches located in a relatively small area. If you’re planning on visiting a branch, check beforehand whether it’s open or not due to coronavirus restrictions.
- Mobile App: A mobile banking app, much like internet banking, allows you to carry out many banking tasks from the comfort brinks money card direct deposit your own home. If you’re particularly opposed to having to visit a branch, you’ll need to make sure that the app caters to your needs.
- FDIC Insurance: While regional banks are unlikely to fail, it best regional bank stocks not impossible either. Having FDIC insurance will make sure you are covered should the worst happen.
- ATM Networks: ATM networks are an important feature if you withdraw cash regularly. Make sure the bank’s network services the area you visit most to avoid paying unnecessary ATM fees.
- Interest Rates: Like other financial institutions, regional banks offer interest rates on their savings accounts, with rates varying from one bank to the next.
Regional Bank Fees
While smaller banks tend to have more advantageous fees, this will not be the case in every situation.
Fees and costs are very fluid,d and while banks do their best to remain competitive, being cheaper is not always going to be the winning formula for banks.
Nobody likes to pay fees, but you’re more than likely to get extra services and perks for those fees you pay. You have to be careful of paying fees for services and perks that you do not need.
Because of this, the secret is first to understand your financial situation and your goals and aspirations, then find the bank that can help you now and in the future, at the least cost possible.
Finding one that fits the bill might not be the easiest of tasks. There’s no secret formula as everyone’s needs and goals are different.
But regional banks are a good place to start looking, as they sit mid-way between the smaller banks and the bigger banks.
Going through them will help you understand if you need something more advanced or if a local community bank is your answer.
Potential Regional Bank Fees
- Monthly Fees: Just like other banks, regional banks can charge fees unless you meet some requirements to avoid the checking account fees, such as keeping an average balance or making several deposits.
- Overdraft Fees: Overdraft fees tend to be some of the most expensive bank fees around, with some banks offering overdraft protection to help you limit how much you end up paying should you overdraw your account.
- ATM Fees: ATM fees are a particular concern with regional banks since these tend to have a more limited presence, which is why best regional bank stocks number of them partner up with nationwide ATM networks to allow you for more fee-free withdrawals
These are not the only fees regional banks have, but they tend to be very common county bank routing number somewhat unavoidable. That’s why you need to plan to ensure america fc channel you don’t pay more fees than strictly necessary.
If you already have a bank account, go through the statement to see which fees weigh you down the most. Make a list of them to find the regional bank that offers these fees for lower costs.
Regional Banks In The Stock Market
If you’re not ready to open a bank account with a regional bank yet but like the idea, you can also invest in them by purchasing stocks in the SPDR S&P Regional Banking ETF (Ticker: KRE).
This ETF tracks many regional bank stocks, included in the S&P Regional Banks Select Industry Index.
Regional Banks FAQs
What is considered a regional bank?
A regional bank is a bank that operates within a limited geographical area. This area’s size will vary from one regional bank to another, with some banks being much bigger than others.
How many regional banks are there in the US?
There are over 19,000 regional banks in the US; however, this depends on which definition of regional banks you use. This statistic includes banks that have assets under management totaling between $50 billion and $500 billion.
What are the four types of banks?
The four types of banks are:
- Central Banks
- Retail Banks
- Investment Banks
- Regional Banks
While there can become overlap between these types (for example, all regional banks are commercial banks but not all commercial banks are retail banks), others, such as Central Banks, serve a very specific purpose.
In this case, Central Banks manage all of the other banks that fall within their jurisdiction.
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4 Major Regional Bank Stocks to Watch in a Prospering Industry
The Zacks Major Regional Banks industry continues to bear the brunt of near-zero interest rates and muted lending scenario. Though there has been a solid economic rebound, these adverse factors will keep hampering growth in banks’ net interest margins and interest income.
However, business restructuring and expansion initiatives, and technological investments are likely to provide much-needed support. Robust asset quality, reserve releases, and economic recovery are likely to be tailwinds. JPMorgan Chase & Co. (JPM - Free Report) Bank of America Corp. (BAC - Free Report) Citigroup Inc. (C - Free Report) and The PNC Financial Services Group, Inc. (PNC - Free Report) are expected to benefit from these 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 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 interest income, major regional banks provide a wide range 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 source of revenues for these banks comprises fees and commissions earned from these services.
4 Trends Shaping the Future of the Major Regional Bank Industry
Business Restructuring Offers Support: Major regional banks are undertaking strategic measures to counter the fallout from low interest rates and soft loan demand by restructuring operations and expanding into new avenues. Some of the key driving factors are the need for technological advancement and further domestic/global expansion. Banks like Fifth Third BancorpFITB, Truist FinancialTFC, and U.S. Bancorp USB are investing heavily in artificial intelligence and other digital platforms, and even partnering/acquiring providers of such services as there has been a significant rise in demand for these amid the coronavirus pandemic.
Major banks including JPMorgan and Citigroup have been expanding footprint outside of the United States and into the U.K. and China. Also, 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. Wells Fargo WFC and Citigroup are doing the same.
Asset Quality Shows Signs of Improvement: For the most of last year, major regional banks built additional provisions worth billions of dollars to tide over unexpected defaults and payment delays owing to the economic slowdown resulting from the coronavirus mayhem. This substantially hurt their profitability in the first half of 2020. However, with a strong economic revival and the current steady pace in vaccination coverage globally, banks have begun to release these reserves back into the income statement. Further, the government stimulus package and support from the central bank are expected to keep aiding banks’ asset quality in the near term.
Full-fledged Capital Distributions Resume: After a year’s hiccup owing to the COVID-19 ambiguity, major regional banks came out with capital plans in June to reward shareholders with billions of dollars in the form of dividends and share repurchases through the second quarter of 2022. This followed the clearance of this year’s stress test and subsequent approval from the Fed. While ending the restrictions on capital distributions (imposed last year to conserve liquidity to tide over economic slowdown), the central bank had noted that banks remained “well capitalized” even under the severe economic downturn.
Low Rates & Soft Loan Demand Hurt Revenues: Major regional banks substantially benefit from higher interest rates. However, in March 2020, the Fed slashed the interest rates to near-zero to support the U.S. economy from the coronavirus-related mayhem. Since then, the central bank has been signaling no chance of a rate hike anytime soon. Also, loan demand continues to be weak. Thus, these factors will adversely impact the banks’ net interest margin and net interest income growth.
Zacks Industry Rank Indicates Bright 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 #123, which places it in the top 49% 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. Over the past year, the industry’s earnings estimates for the current year have been revised 73.5% upward.
Before we present a few stocks that you might want to consider despite low rates, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Major Regional Banks industry has outperformed the S&P 500 composite and its own sector over the past year. While the stocks in this industry have collectively surged 58.9% over the period, the Zacks S&P 500 composite has gained 35.3% and Zacks Finance sector has rallied 40.6%.
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 best regional bank stocks large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 2.24X. This compares with the highest level of 2.68X, lowest of 1.21X, and median of 2.15X over the past five years. Additionally, 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 17.14X, 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 4.43X. This is above the Zacks Major Regional Banks industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
4 Major Regional Bank Stocks to Keep an Eye on
JPMorgan: The largest U.S. bank (in terms of assets), JPMorgan has operations in more than 60 countries. The bank is expanding its footprint in new regions and aims to enter 25 new markets by opening roughly 400 branches by 2022-end. Apart from enhancing its scale, the strategy will help the bank grab cross-selling opportunities by increasing its presence in the card and auto loan sectors.
This Zacks Rank #3 (Hold) bank is also taking measures to further diversify operations. While JPMorgan is too big to be allowed to acquire another bank, it has been making strategic buyouts to strengthen fee income sources. Over the past few months, the company has been on an expansion spree and has announced several acquisitions including OpenInvest, a 40% stake in Brazil's C6 Bank, the U.K.-based robo-advisor Netmeg, and 55ip.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Following the clearance of this year’s stress test, JPMorgan announced its plan to hike quarterly dividend by 11.1% to $1 per share, effective third-quarter 2021. It intends to continue with the previously announced share buyback plan. For 2021, the company had authorized to repurchase shares worth up to $30 billion.
With a market cap of $475.7 billion, JPMorgan is expected to continue benefiting from its scale and business expansion efforts. Also, analysts are bullish on the stock. The Zacks Consensus Estimate for earnings has moved 6% upward for 2021 over the past 60 days.
The stock has gained 25.3% so far this year. The company’s long-term (three-five years) projected earnings growth rate of 5% promises rewards for shareholders.
Price and Consensus: JPM
Bank of America: With total assets worth $3.03 trillion as of Jun 30, 2021, BofA is one of the largest financial holding companies in the United States. The company provides a diverse range of banking and non-banking financial services and products across North America and globally.
BofA continues to align its banking center network according to customer needs. It is on track to open 500 centers in new cities and redesign 2,500 centers with technology upgrades. These efforts, along with the success of Zelle and Erica, have enabled the company to improve digital offerings and cross sell several products including mortgages, auto loans, and credit cards. The acquisition of Axia Technologies will further strengthen the company's healthcare payments business.
Prudent cost management continues to support the bank’s financials. Its expense-saving plan – Project New BAC (launched in 2011) – helped improve overall efficiency how do you apply for amazon credit card save as much as $8.0 billion in operating expenses annually till 2014. Over the last several quarters, BofA has incurred on an average $14 billion in expenses, despite undertaking strategic growth initiatives.
In July 2021, following the Fed’s approval, BofA announced a dividend hike of 17% to 21 cents per share. The company's share repurchase plan remains at the previously announced level of $25 billion.
With a market cap of $345.4 billion, BofA’s efforts to improve revenue growth, strong balance sheet, and expansion into new markets will support financials. Further, analysts are bullish on the stock. Over the past two months, the Zacks Consensus Estimate for earnings has been revised 8.4% upward for 2021.
The stock, which currently carries Zacks Rank #3, has gained 36.3% so far this year. The company’s long-term (three-five years) projected earnings growth rate of 7% promises rewards for shareholders.
Price and Consensus: BAC
Citigroup: As a globally diversified financial services holding company, Citigroup provides a range of financial products and services including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. The company has nearly 200 million customer accounts in more than 160 countries and jurisdictions.
This Zacks Rank #3 company continues to increase fee-based business mix and shrink its non-core assets. It has been emphasizing growth in core businesses through streamlining operations internationally. In April, the bank announced a major strategic action, whereby the Global Consumer Banking segment will exit 13 markets saving account interest calculator online Asia and EMEA. With the move, Citigroup seeks to focus more on wealth division operations in Singapore, Hong Kong, the UAE, and London.
While the low interest rate environment and sluggish loan demand have been hurting Citigroup’s net interest revenues, economic recovery, as well as a rebound in consumer and corporate confidence, is anticipated to drive loan growth.
Citigroup has a market cap of $144.2 billion. A diverse business model, focus on core operations, and streamlining of international businesses will keep supporting the company’s prospects. Also, analysts are bullish on the stock. Over the past 60 days, the Zacks Consensus Estimate for earnings has moved 9.4% upward for 2021.
In the year-to-date period, the stock has rallied 14.8%. The company’s long-term (three-five years) projected earnings growth rate of 8% promises rewards for shareholders.
Price and Consensus: C
PNC Financial: Through a branch network of more than 2,700 blackhawk bank and trust aledo il primarily in markets across the Mid-Atlantic, Midwest, Southeast and Southwest, PNC Financial provides consumer and business banking services.
The company is committed toward developing its business through strategic initiatives. In June, PNC Financial acquired BBVA, S.A.’s subsidiary BBVA USA Bancshares, Inc., which positioned it as the fifth-largest commercial bank in the United States (in terms of assets and presence). Also, the company plans to extend the reach of middle-market corporate banking franchise into new markets and expand its retail banking brand nationally.
Following this year’s stress test results, PNC Financial continues to progress with its capital deployment strategy. In July, the bank hiked the quarterly cash dividend by 9% to $1.25 per share. It also announced its intention to reinstate share repurchase programs with buybacks of up to $2.9 billion for the four-quarter period beginning in the third quarter of 2021.
PNC Financial has a market cap of $81.4 billion. Analysts are bullish on the stock, which currently carries a Zacks Rank of 3. Over the past 60 days, the Zacks Consensus Estimate for earnings has moved 8.7% upward for 2021.
In the year-to-date period, the stock has rallied 29%. The company’s long-term (three-five years) projected earnings growth rate of 25.6% promises substantial rewards for shareholders.
Price and Consensus: PNC