Reduced pace of revenue growth and rapidly mounting expenses have remained major concerns for U.S. banks during the third quarter. Fundamentally, revenue and earnings growth has become uncertain on the back of a stronger dollar, plummeting commodity prices, weak emerging markets, restricted business and consumer spending, persistent low rate environment and volatile capital markets.
Banks are continuously looking for cost-saving opportunities to improve the bottom-line performances. Among other steps to curb costs, banks are increasingly spending on technological development in order to substitute labor and manage higher volumes, and increase operational efficiency.
On the investment banking front, with elevated M&A activities, advisory and underwriting revenues should show improvement. However, the equities division might witness a slowdown due to cautious steps taken by investors amid uncertainties surrounding the global economies and domestic interest rate environment.
Mortgage business on the other hand looks to have been rising, as the low rate environment might have pushed people to refinance home loans. Moderate growth in fresh mortgage originations is also expected. Further, gradually improving economic indicators helped the banks witness a rising trend in areas including auto, credit card and commercial real-estate lending. Nevertheless, weak energy sector lending, as a result of continued downward trend in oil prices, will remain a major headwind.
Despite a rise in loan demand, revenue growth will remain restrained (similar to previous quarters) due to the impact of a 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 markets.
The broader finance sector, of which banks constitute a major part, will be a growth contributor in the third quarter, with an expected increase in earnings of 6.6% year over year. However, this compares unfavorably with 7.2% growth witnessed in the prior quarter. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trend report).
While the tough industry backdrop is likely to be reflected in the results of the U.S. banking biggies, we can also expect signs of resilience and improvement in their performances. So this is perhaps the right time to add some major banking stocks that are poised to beat earnings in their upcoming announcement.
The Way to Pick Right Stocks
Picking the most rewarding stocks within the industry might be a difficult task unless one knows the tactic 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.
The PNC Financial Services Group, Inc. (PNC – Analyst Report) has an earnings ESP of +0.56% and carries a Zacks Rank #3. It is scheduled to report its third-quarter results on Oct 14.
The earnings ESP for M&T Bank Corporation (MTB – Analyst Report) is +1.52% and it carries a Zacks Rank #3. The company is expected to release its third-quarter results on Oct 16.
SunTrust Banks, Inc. (STI – Analyst Report) has an earnings ESP of +1.21% and carries a Zacks Rank #3. It is scheduled to report its third-quarter results on Oct 16.
The earnings ESP for The Bank of New York Mellon Corporation (BK – Analyst Report) is +1.39% and it carries a Zacks Rank #3. The company is expected to release its third-quarter results on Oct 20.
Wintrust Financial Corporation (WTFC – Snapshot Report) has an earnings ESP of +2.35% and carries a Zacks Rank #3. It is scheduled to report its third-quarter results on Oct 14.
