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Major Regional Bank Stock Outlook Dim on Rate Cuts, Coronavirus

Swayta Shah

The Zacks Major Regional Banks industry includes the nation’s largest banks in terms of assets, most operating globally. Financial performance of these banks largely depends on the nation’s economic health. As the banks are involved in a number of complex financial activities, they are required to meet the stringent regulations set by the Federal Reserve and other agencies.

In addition to traditional banking services, which are the source of interest income, major regional banks provide a wide array of financial services and products to retail, corporate and institutional clients, both domestic and global. The services offered include credit and debit cards, wealth management and investment banking, among others. Therefore, a large source of revenues for these banks is fees and commission earned from these services.

Prominent names in this industry are Bank of America (BAC), Comerica (CMA), Fifth Third Bancorp (FITB), KeyCorp (KEY), M&T Bank (MTB), Northern Trust (NTRS), State Street (STT), BNY Mellon (BK), U.S. Bancorp (USB), Citigroup (C), PNC Financial (PNC) and Wells Fargo (WFC) .

Here are the three major industry themes:

  • Major regional banks significantly benefit from higher interest rates. However, to support the U.S. economy from coronavirus-related mayhem, the Fed slashed interest rates to near zero this March. This will substantially hurt banks’ net interest margin and net interest income. The current uncertain economic environment has impacted business activities, resulting in a decline in new investments. Thus, this is likely to result in less demand for corporate loans, in turn hurting banks’ revenues significantly.
     
  • Major regional banks’ asset quality is expected to deteriorate with the slowing down of economic growth on coronavirus outbreak, resulting in a rise in delinquency rates. Also, banks will have to build extra provisions in order to tide over unexpected defaults and payment delays. Thus, this will majorly hurt their bottom line.
     
  • These banks are investing considerably in AI and other digital platforms to improve online and mobile banking services, and ward off competition from Fintech and other large tech companies. In fact, banks like Bank of America and JPMorgan have been successful in offering customized digital services. While technological investments are expected to result in a rise in operating costs to some extent in the near term, the efforts will help banks save time and provide less error-prone services.

Zacks Industry Rank Indicates Bleak Picture

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 #250, which places it in the bottom 1% 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 underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of disappointing earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since December 2019-end, the industry’s earnings estimates for the current year have been downwardly revised by more than 18%.

Before we present a few stocks that you may want to consider for your portfolio despite near-term blip in the industry. Let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Underperforms Sector and S&P 500

The Zacks Major Regional Banks industry has underperformed the S&P 500 composite and its own sector over the past year.

While the stocks in this industry have collectively lost 23.4% over this period, the Zacks S&P 500 composite and Zacks Finance sector have declined 4.6% and 19.4%, respectively.

One-Year Price Performance

 

Industry’s Valuation

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 of large variations in their earnings results from one quarter to the next.

The industry currently has a trailing 12-month P/TBV of 1.50X. This compares with the highest level of 2.68X, lowest of 1.21X and median of 2.12X over the past five years. Additionally, the industry is trading at a discount when compared to the market at large, as the trailing 12-month P/TBV for the S&P 500 composite is 10.39X, 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 its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 2.41X for the same period is slightly above the Zacks Major Regional Banks industry’s ratio, as the chart below shows.

Price-to-Tangible Book Ratio (TTM)

 

Bottom Line

Investments in technology and efforts to find new avenues will gradually result in higher expenses, with revenues getting adversely impacted due to the virus outbreak. Nonetheless, major regional banks might benefit in the near term from the strategic restructuring initiatives undertaken over the past few years.

Thus, investors may keep an eye on a few major regional bank stocks, given their decent earnings outlook.

None of the stocks in the Zacks Major Regional Bank space currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). So, we are presenting two stocks with a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank stocks here.

JPMorgan (JPM): The stock has lost 32.3% so far this year. The company’s the long-term (three-five years) projected earnings growth rate of 5% promises rewards for shareholders.

Price and Consensus: JPM

Truist Financial (TFC): The stock has surged 42% year to date. The company’s the long-term (three-five years) projected earnings growth rate of 8.2% promises rewards for shareholders.

Price and Consensus: TFC
 

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Wells Fargo & Company (WFC) : Free Stock Analysis Report
 
U.S. Bancorp (USB) : Free Stock Analysis Report
 
Truist Financial Corporation (TFC) : Free Stock Analysis Report
 
State Street Corporation (STT) : Free Stock Analysis Report
 
The PNC Financial Services Group, Inc (PNC) : Free Stock Analysis Report
 
Northern Trust Corporation (NTRS) : Free Stock Analysis Report
 
M&T Bank Corporation (MTB) : Free Stock Analysis Report
 
KeyCorp (KEY) : Free Stock Analysis Report
 
JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
 
Fifth Third Bancorp (FITB) : Free Stock Analysis Report
 
Comerica Incorporated (CMA) : Free Stock Analysis Report
 
Citigroup Inc. (C) : Free Stock Analysis Report
 
The Bank of New York Mellon Corporation (BK) : Free Stock Analysis Report
 
Bank of America Corporation (BAC) : Free Stock Analysis Report
 
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