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How are US Bank Stocks Priced Going Into 3Q2018 Earnings?

Oct 17, 2018

  • This week marks the beginning of 3Q2018 earning releases for US stocks with bank and financial stocks kicking off the earnings season -- so far, 10 of the 24 stocks that make up the KBW Nasdaq Bank Index (BKX) have reported 3Q2018 earnings.  
  • US bank and financial stocks have delivered mostly positive earnings in 3Q2018 headlined by Bank of America Corporation (BAC) beating consensus forecasts of USD$0.62 by 7.94% with 3Q2018 EPS of USD$0.67 and Comerica Inc. (CMA) beating consensus EPS forecasts of USD$1.78 by 6.26% with 3Q2018 EPS of USD$1.89.  
  • So far, two stocks in the KBW Nasdaq Bank Index have fallen short on earning expectations -- Northern Trust Corporation (NTRS) missed consensus EPS forecasts of UD$1.61 by –1.57% with 3Q2018 EPS of USD$1.59 while Wells Fargo (WFC) missed consensus EPS forecasts of USD$1.17 by –2.72% with 3Q2018 EPS of USD$1.14.  
  • US bank stocks are set to benefit from rising interest rates as banks will be able to increase the spread between what they pay for funds (deposits, Fed funds, etc.) and the interest rates they charge borrowers, known as net interest margin -- so far in 2018, the US Federal Reserve has raised interest rates three times with one more expected by the end of the year. Most banks are asset sensitive, that is, on assets in the aggregate, they can raise the rates they charge borrowers more, and more quickly, than the rates they pay for funds. 
  • In comparing the Next Twelve Months Price/Earnings (NTM P/E) and Last Twelve Months Return on Equity (LTM ROE), several US banking stocks standout as cheap while others are expensive.  
  • Bank of America Corporation (BAC), KeyCorp (KEY), Citizens Financial Group (CFG), and Capital One Finance Corporation (COF) all deliver superior LTM ROE relative to their NTM P/E and standout as cheap banking stocks relative to their peers -- BAC especially standouts after delivering a 7.94% earnings surprise in their 3Q2018 earnings release.  
  • First Republic Bank (FRC), SVB Financial Group (SIVB), and Northern Trust Corporation (NTRS) all standout as expensive banking stocks relative to their peers primarily due to high NTM P/E multiples -- NTRS' expensive valuation is exacerbated after missing 3Q2018 EPS consensus forecasts by –1.57%. 
  • A K-Means AI methodology, applied to price data, tells us that Bank of America Corporation (BAC), KeyCorp (KEY), and Capital One Finance Corporation (COF) cluster together
    • It might be better to choose between Bank of America Corporation (BAC), KeyCorp (KEY), and Capital One Finance Corporation (COF) rather selecting all three stocks when constructing your diversified portfolio -- buying all three may inadvertently cause an investor to over-concentrate in a specific cluster
  • Of the bank stocks that make up the BKX, only M&T Bank Corporation (MTB) is rated as 'Top Buy' in our US Large-Cap Global Top Stock Ideas.


Source: Capital IQ

K-Means Clustering of BKX Constituents using YTD Price Data



Cluster Name Ticker 3Q2018  EPS Estimate 3Q2018 Actual EPS % Surprise
1 First Republic Bank/CA FRC $1.20 $1.20 0.30%
1 Huntington Bancshares Inc/OH HBAN $0.32                  -                    -  
1 JPMorgan Chase & Co JPM $2.26 $2.35 4.08%
1 Northern Trust Corp NTRS $1.61 $1.59 -1.57%
1 Regions Financial Corp RF $0.36                  -                    -  
2 Citizens Financial Group Inc CFG $0.90                  -                    -  
2 Fifth Third Bancorp FITB $0.63                  -                    -  
2 People's United Financial Inc PBCT $0.33                  -                    -  
2 PNC Financial Services Group Inc/The PNC $2.72 $2.84 4.14%
2 State Street Corp STT $1.89                  -                    -  
2 Wells Fargo & Co WFC $1.17 $1.14 -2.72%
3 SVB Financial Group SIVB $4.48                  -                    -  
4 Bank of America Corp BAC $0.62 $0.67 7.94%
4 Bank of New York Mellon Corp/The BK $1.04                  -                    -  
4 BB&T Corp BBT $1.00                  -                    -  
4 Capital One Financial Corp COF $2.84                  -                    -  
4 Citigroup Inc C $1.66 $1.73 4.48%
4 Comerica Inc CMA $1.78 $1.89 6.26%
4 KeyCorp KEY $0.45                  -                    -  
4 M&T Bank Corp MTB $3.35 $3.54 5.76%
4 SunTrust Banks Inc STI $1.39                  -                    -  
4 US Bancorp USB $1.04 $1.06 1.87%
4 Zions Bancorp NA ZION $0.96                  -                    -  
5 New York Community Bancorp Inc NYCB $0.20                  -                    -  

Source: Capital IQ

Source: Capital IQ