- The first-quarter earnings season kicks off this week with major banks reporting their results.
- Analysts expect banks to be the largest contributor to growth for financials during Q1.
- (BofA) is bullish on banks and names six stocks that could outperform as results come in.
- See more stories on Insider’s business page.
This week, investors are increasingly turning their attention to banks as earnings results for the first quarter of the year start to roll in.
The first-quarter earnings season kicks off on Wednesday with major banks, including JPMorgan Chase, Wells Fargo, and Goldman Sachs, reporting their performances.
For the first quarter, the estimated earnings growth rate for the S&P 500 is 24.5%, said John Butters, a senior earnings analyst at FactSet. That’s just above the highest year-over-year rate ever reported by the index, which was 26.1% in the third quarter of 2018, Butters wrote in a recent note.
A winning sector this time should be financials. It is expected to report the second-highest year-over-year earnings growth out of all 11 market sectors. Additionally, rising interest rates likely contributed to the increase in earnings estimates for companies within financials, Butters said.
But more specifically, the banking industry is projected to be the largest contributor to growth for the sector, he added.
Bank of America is also bullish on banks and believes valuations still have room to go higher if the macroeconomic outlook plays out in accordance with its forecasts and rate-hike expectations solidify, Ebrahim Poonawala, a research analyst at Bank of America, wrote in a note on Monday.
The bank’s economists expect gross domestic product to grow by more than 7% this year. At the same time, Americans are more worried about rising prices than they’ve been in the past seven years.
While this environment isn’t particularly beneficial for some businesses, it is for banks. A period of strong economic growth can lead to higher interest rates as the
aims to slow expansion. Consumers also seek loans in a strong economy, and banks can benefit from this as they are able to profit more on loans and transactions.
Poonawala said his team continued to favor banks where unique business models or self-help levers can help drive growth.
6 stock picks
In this respect, Poonawala’s team named six stocks whose first-quarter earnings results serve as potential drivers for above-average growth and stock outperformance.
The first one is SVB Financial (SIVB), which it said is primed to capitalize on the digitization of the global economy and banking sector.
“This should result in upside surprises on revenue growth. Additionally, the Boston Private acquisition should serve as a meaningful growth engine while potentially providing lending diversification,” Poonawala said.
The second name that’s best positioned for outperformance is Signature Bank (SBNY).
Poonawala said investors will be focusing on how strong deposit growth converts into spread revenue, or the difference between assets such as loans and the cost of its funds.
Investors are also expected to pay attention to whether Signature Bank continues to operate with large amounts of excess cash with a negative carry position, or a condition where holding investments costs more than what they bring over in the short term.
“Our PO of $300 is based on 2.65x our ’21E tangible book value (TBV, 60% of PO) and 2.55x our ’22E TBV (40% of PO), above peers due to stronger balance sheet growth and a healthy credit profile,” Poonawala wrote.
The third is East West (EWBC), whose presence in China and Hong Kong acts as a positive differentiator on the growth front, Poonawala said. And given that China is ahead of the US when it comes to digital banking, management can gain insights into the country’s advancing digital-banking landscape, he added.
“Above avg. 1Q21 loan growth and evidence that the core margin/spread income has bottomed should serve as positive catalysts for the stock, with EWBC continuing to trade at a significant discount to high growth peers,” Poonawala wrote.
The fourth stock is New York Community (NYCB). Poonawala said to expect another quarter with strong credit quality and expanding net interest margin, which is a measurement comparing the net interest income a bank makes from loans with the interest it pays its lenders.
The fifth is First Bancorp (FBP), given the anticipation for a potential share-buyback announcement. The magnitude of the buyback authorization and management’s ability to “finally” return excess capital to shareholders could serve as a positive catalyst for the stock, he said.
The final one is Great Western (GWB) because management’s “actions to rejuvenate the franchise by hiring key talent, undertake technology investment and focus on growth markets should drive a rebound in topline revenue growth,” Poonawala said.