Banks Kick Off Q1 With Blowout Earnings: 5 Top Picks

Earnings of the biggest U.S. banks vaulted to the highest level in the first quarter after 2007 on corporate tax cuts. Without the tax overhaul, The Goldman Sachs Group, Inc. GS and Wells Fargo & Company’s WFC earnings would have shrunk, while Citigroup Inc. C, Bank of America Corporation BAC and JPMorgan Chase & Co. JPM would see tepid growth.

Rising interest rates, by the way, boosted lending activities, while volatility made a comeback in the first quarter helping trading revenues improve. Lesser regulations also reduced banks’ costs and drove earnings.

This bullishness puts the spotlight on banks that are likely to make the most of this earnings season. Banks are poised to report stellar earnings, which will eventually lead to an uptick in share price.

Big Banks Make $2.5B From Tax Law

Big banks have significantly benefitted in the first quarter from the latest federal tax law. The combined earnings of Goldman Sachs and four major national banks, including JPMorgan, Wells Fargo, Citigroup and Bank of America, increased more than $2.5 billion in the said quarter due to a lower corporate tax rate, according to an analysis of bank results by The Wall Street Journal.

The new tax bill trims the corporate tax rate from 35% to 21%, making it the biggest one-time drop in business tax rates ever. Making the most of it, Goldman Sachs recorded first-quarter profit growth of 26% year over year as the tax cut lifted earnings by around $232 million. Without tax savings, Goldman’s earnings would have been down by a quarter. Wells Fargo’s earnings would have also declined from year-ago levels while a major chunk of the year-over-year growth at Citigroup and Bank of America would have been erased.

The tax overhaul, in the meantime, helped both the Bank of America and JP Morgan add about $798 million and $470 million in net-income growth, respectively. As it is, banks face a high tax burden, which makes them gain handsomely when tax rates go down. KBW estimates had already noted that banks such as Wells Fargo, Bank of America, JPMorgan to name a few will always enjoy a 20% or more hike in profits if the corporate tax rate is trimmed to around 20%.

Banks Operating Activity Remains Firm

While the big banks acknowledged that the reduction in corporate tax rate boosted their first=quarter earnings, their operations also continue to remain solid.

Citigroup’s chief executive, Michael Corbat said that “a lower tax rate was a contributing factor to the bank’s results along with strong business performance.”

Bank of America’s Chief Financial Officer Paul Donofrio acknowledged that “earnings growth was driven not only by tax reform but also operating leverage and continued strong asset quality,”

JPMorgan’s CFO Marianne Lake added that tax overhaul boosted earnings but the banks’ results also profited from “broad-based strength.”

Higher Interest Rates – Always Good for Banks

Citigroup, Bank of America and JP Morgan benefited from the Fed’s rates hikes twice in the past four months, which means that they can charge more for loans. Needless to say, higher interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

All the three banks have registered higher net interest income in the first quarter, which they have attributed to higher rates and loan growth. A strong jobs market and rise in income have lent consumers the flexibility to borrow more. Wells Fargo, however, was prohibited by the Fed from increasing its assets provided it addresses recent mishaps. Thus, the diversified financial services company saw its interest income take a dip.

Volatility Bolster Equity Trading

Stock market turbulence in the first three months of the year, triggered by uncertainty over global trade policy and possibilities of higher prices of essential commodities, boosted the banks’ derivatives and prime-service desks. Market volatility helped JP Morgan post record revenue growth from equity trading while Citigroup and Bank of America recorded their best revenue growth since 2010.

Gerard Cassidy of RBC Capital Markets rightly pointed out that “the volatility in the markets came in and helped the equity trading. In particular, equity derivatives benefited both Bank of America as well as the other players.”

5 Bank Stocks to Buy in Q1 Earnings

The aforesaid factors will surely help banks stay afloat in the first quarter. For the Finance sector, of which the Major Banks industry is the biggest earnings contributor, total Q1 earnings are expected to be up 22.7% from the same period last year on 4.7% higher revenues. This would follow 0.6% earnings growth in the preceding quarter on 4% higher revenues.

This calls for investing in five banks, which are expected to report a significant uptick in first-quarter earnings. These stocks have a positive Earnings ESP — our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. These stocks also flaunt a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Atlantic Capital Bancshares, Inc. ACBI operates as the holding company for Atlantic Capital Bank that provides commercial banking products and services in the United States. The company is expected to report earnings results for the quarter ending March 2018 on Apr 26. Atlantic Capital Bancshares has an Earnings ESP of +5.88%. The company, which is part of the Banks - Northeast industry, is projected to rally 75.5% in 2018.

National Commerce Corporation NCOM operates as the bank holding company for National Bank of Commerce that provides various financial services to businesses, business owners, and professionals. The company is expected to report earnings results for the quarter ending March 2018 on Apr 24. National Commerce has an Earnings ESP of +4.0%. The company, which is part of the Banks - Southeast industry, is expected to gain 40.6% this year.

BOK Financial Corporation BOKF operates as the financial holding company. It operates through three segments: Commercial Banking, Consumer Banking, and Wealth Management. The company is expected to report earnings results for the quarter ending March 2018 on Apr 25. BOK Financial has an Earnings ESP of +0.24%. The company, which is part of the Banks - Southwest industry, is expected to gain 21.7% in 2018.

Lakeland Financial Corporation LKFN operates as the bank holding company for Lake City Bank that provides various banking products and services in Indiana. The company is expected to report earnings results for the quarter ending March 2018 on Apr 25. Lakeland Financial has an Earnings ESP of +0.95%. The company, which is part of the Banks - Midwest industry, is likely to gain 23.9% this year.

Merchants Bancorp MBIN operates as a diversified bank holding company in the United States. It operates in three segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking. The company is expected to report earnings results for the quarter ending March 2018 on May 10. Merchants Bancorp has an Earnings ESP of +6.33%. The company, which is part of the Banks - Northeast industry, is projected to rally 7.6% in 2018.

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JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
 
Wells Fargo & Company (WFC) : Free Stock Analysis Report
 
Citigroup Inc. (C) : Free Stock Analysis Report
 
Bank of America Corporation (BAC) : Free Stock Analysis Report
 
Lakeland Financial Corporation (LKFN) : Free Stock Analysis Report
 
Atlantic Capital Bancshares, Inc. (ACBI) : Free Stock Analysis Report
 
National Commerce Corporation (NCOM) : Free Stock Analysis Report
 
BOK Financial Corporation (BOKF) : Free Stock Analysis Report
 
The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
 
Merchants Bancorp (MBIN) : Free Stock Analysis Report
 
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