Zacks Industry Outlook Highlights: Bank of America Corp., Fifth Third Bancorp and KeyCorp
For Immediate Release
Chicago, IL – February 4, 2022 – Today, Zacks Equity Research discusses Bank of America Corp. BAC, Fifth Third Bancorp FITB and KeyCorp KEY.
– Zacks Industry: Regional Banks
The Zacks Major Regional Banks industry, which bore the brunt of near-zero interest rates and muted lending scenario since the beginning of 2020, is expected to benefit from the central bank’s hawkish monetary stance. This, along with solid economic growth and higher demand for loans, will aid banks’ net interest margin and interest income.
Business restructuring and expansion initiatives, robust asset quality and digitization will provide additional support. Hence, Bank of America Corp. , Fifth Third Bancorp and KeyCorp are expected to gain from these favorable developments.
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 in 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 net interest income (NII), major regional banks provide a wide array 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 Key Trends to Watch for the Major Regional Bank Industry
Hawkish Fed & Rise in Loan Demand: Major regional banks substantially benefit from higher interest rates. So, the Fed signaling the first interest rate hike since 2018 this March comes as a breather for banks. It must be noted that banks have been reeling under near-zero interest rates since March 2020, which adversely impacted their net interest margin (NIM) and NII growth.
Market participants are expecting anything from five to seven rate hikes this year. This will result in higher NIM and NII. This, along with strong economic growth and a decent rise in loan demand, will support banks’ top-line growth.
Business Restructuring Efforts: Major regional banks are taking 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 vital driving factors are the need for technological advancement and further domestic/global expansion.
Banks are investing heavily in artificial intelligence and other digital platforms and even partnering/acquiring providers of such services as the demand for these witnessed a substantial rise amid the COVID-19 pandemic. Major banks are also aggressively expanding their footprint outside the United States and into the U.K. and China.
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.
Solid Asset Quality: For the large part of 2020, 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 financials in the first half of 2020.
However, with strong economic growth, banks have begun to release these reserves back into the income statement. The government stimulus package and support from the central bank aided banks’ asset quality. Going forward, while the demand for loans continues to rise, conservative lending policy and resilience of borrowers will help banks’ asset quality to remain strong.
Impressive Capital Distributions: After a year’s hiccup owing to the COVID-19 ambiguity, major regional banks came out with capital plans in June 2021 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 the 2021 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.
Zacks Industry Rank Indicates Solid 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 #54, which places it in the top 21% 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 6% upward.
Before we present a few stocks that you might want to consider on the expectations of rising interest rates and other favorable developments, 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 soared 32.6% over the period, the Zacks S&P 500 composite has gained 18.7% and Zacks Finance sector has rallied 20.4%.
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 2.35X. This compares with the highest level of 2.68X, lowest of 1.21X, and median of 2.19X over the past five years. 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 17.11X, as the chart below shows.
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 4.58X. This is above the Zacks Major Regional Banks industry’s ratio.
3 Major Regional Bank Stocks Worth Investing In
Bank of America: With total assets worth $3.17 trillion as of Dec 31, 2021, Bank of America 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.
Bank of America continues to align its banking center network according to customer needs. These initiatives, along with the success of Zelle and Erica, have enabled it to improve digital offerings and cross-sell several products, including mortgages, auto loans and credit cards. The acquisition of Axia Technologies (March 2021) has further strengthened its healthcare payments business.
Bank of America is immensely benefiting from the global deal-making frenzy. Per the Dealogic data, its global IB fee market share has improved 35 basis points from the 2019 level to 6.4% in 2021. With deal-making and underwriting business anticipated to continue at a robust pace, the company is likely to record steady growth in IB fees.
Prudent cost management continues to support this Zacks Rank #2 (Buy) bank’s financials. Its expense-saving plan – Project New BAC (launched in 2011) – helped improve overall efficiency. Over the last several quarters, the company has incurred on an average $14 billion in expenses, despite undertaking strategic growth initiatives. Though total non-interest expenses rose in 2021, management expects the same for 2022 to be relatively stable.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
In July 2021, following the Fed’s approval, BAC announced a dividend hike of 17% to 21 cents per share. In October, the company’s share repurchase plan of $25 billion was also renewed. During 2021, the company returned $31.7 billion to shareholders in the form of buybacks and dividend payouts.
With a market cap of $378.8 billion, Bank of America’s efforts to improve revenues, strong balance sheet and expansion into new markets will support financials. Further, analysts are bullish on the stock. Over the past month, the Zacks Consensus Estimate for earnings has been revised 2.5% upward for 2022. BAC gained 44.3% over the past year.
Fifth Third Bancorp: With assets of $211 billion, Cincinnati, HO-based Fifth Third Bancorp has more than 1,110 full-service banking centers across 11 states throughout the Midwestern and Southeastern regions of the United States.
FITB’s efforts to expand the non-interest income base over the years with the help of strategic partnerships and acquisitions in different industries such as healthcare (including the pending buyout of Dividend Finance and acquisitions of Coker Capital in 2020 and Provide in 2021) will support commercial verticals. These are expected to result in revenue growth, expense savings and operational excellence.
This Zacks Rank #2 bank remains focused on branch optimization to enhance its presence in high-growth markets. Fifth Third Bancorp is re-allocating its branch network to enhance its footprint in the Southeast and lower its presence in the Midwest.
A strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting the company’s growth. Also, Fifth Third Bancorp’s sustainable capital deployments reflect a solid liquidity position. Nonetheless, in anticipation of strong loan growth and the Dividend Finance deal (that is expected to utilize around 30 basis points of CET1 capital), FITB has paused share repurchase until the second half of 2022.
The company has taken proactive steps to improve its credit quality. Fifth Third Bancorp witnessed a historically-low net charge-off ratio in 2021, backed by improvement in the consumer and commercial portfolios. In line with its strategy to reduce volatility, the company reduced exposures in certain segments like commodity trading.
Shares of FITB, which has a market cap of $31.9 billion, rose 45.4% over the past 12 months. The company’s earnings estimates for 2022 have moved north by 3.3% over the past four weeks.
KeyCorp: Cleveland, OH-based KeyCorp offers a wide range of products and services, including commercial and retail banking, commercial leasing, investment management, consumer finance and investment banking products in 15 states through a network of 999 branches and nearly 1,310 ATMs.
This Zacks Rank #1 company has been witnessing robust organic growth. Tax-equivalent revenues witnessed a CAGR of 3.7% over the last five years (2017-2021). During the same period, loans witnessed a CAGR of 4.2% and deposits saw a CAGR of 9.7%. Growth in deposit balances and a decent rise in demand for loans as economic growth continues, along with the company’s efforts to strengthen fee income, will keep supporting the top line.
KeyCorp’s business restructuring efforts are commendable and are providing immense support to fee income. In 2021, the company acquired a B2B focused digital platform, XUP Payments and a data analytics-driven consultancy firm, AQN Strategies LLC.
These, along with other past buyouts/expansion initiatives, are expected to strengthen its product suites and market share. Also, as demand for digital banking services continues to rise, KEY consolidated more than 70 branches last year, with management continuing to look for opportunities to right-size its footprint.
A strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting KeyCorp’s growth. Also, in November 2021, the company hiked its quarterly cash dividend by 5.4% to 19.5 cents per share. In July, it had announced a new share repurchase authorization of up to $1.5 billion through the third quarter of 2022. As of Dec 31, 2021, nearly $900 million remained under the buyback program.
KeyCorp has a market cap of $23.8 billion and rallied 38% over the past year. Analysts are also bullish on the stock. Over the past 30 days, the Zacks Consensus Estimate for earnings has moved 6.4% upward for 2022.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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