On Wednesday, Janet Yellen will hold her last press conference as Fed Chair after the two-day Federal Open Market Committee (FOMC) policy meeting draws to a close. Investors and market watchers are widely expecting the Fed to announce a quarter percentage point rate hike after this meeting.
Stocks should witness short-term gains post this announcement even though markets have mostly priced in the rate hike call. Financial stocks and banks in particular have been strong performers this year with the KBW Nasdaq Bank Index up 15.7% year to date. A near certain rate hike will only boost banks higher, which is why adding them to your portfolio looks like a smart option.
Rate Hike Nearly Certain
If the Fed does indeed decide to hike rates, it will be the third such increase for 2017. The CME Group’s FedWatch Tool puts the chances of a quarter point rate hike well above 90%, which makes an increase to 1.25% to 1.50% nearly certain. Of course, the Fed Chair has been hinting at a December rate hike for quite some time now, which is why analysts in general believe that such an occurrence has largely been priced in by equity markets.
And last week’s non-farm payrolls possibly removed any doubts over the likelihood of a rate hike completely. The data-dependent Fed’s spirits were significantly lifted after U.S. employers added 228,000 jobs in November, steering past expectations of 200,000. Also, the unemployment rate was unchanged at 4.1% in November and continues to remain at a 17-year low.
Tax Cuts, Deregulation to Boost Banks
Meanwhile, last week’s approval of the new tax legislation by the Senate is another big positive for U.S. banks. Per the new law, the corporate tax rate is expected to be slashed from 35% to 20%.
Banks face a high tax burden, which makes them big gainers when tax rates go down. As per KBW estimates, JPMorgan Chase & Co. JPM, Wells Fargo & Co WFC and Bank of America Corp BAC will enjoy a 20% or more hike in profits if the corporate tax rate is lowered to 20%.
Meanwhile, Yellen’s successor, Trump nominee Jerome Powell has said that he favors loosening regulations for banks. In his Senate confirmation hearing on Nov 29, Powell said certain provisions of the Dodd-Frank Act should be eased, particularly regulations pertaining to banks. Powell thinks these regulations had limited banks’ operational flexibility for a considerable period of time and should be removed soon.
With the abolishment of these provisions, banks will no longer be mandated to maintain high levels of capital reserves. With more capital in the economy, lending will increase, which bodes well for banks.
Our Choices
This month’s near-certain rate hike will give yet another boost to bank margins. Also, the move to reduce corporate tax rates and deregulate the sector bodes well for bank profits. Moreover, it is now widely expected that the Fed will hike rates on three more occasions in 2018, a number which can only rise given the current scenario.
This is why it makes good sense to pick select bank stocks at this point. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.
CoBiz Financial Inc. (NASDAQ:COBZ) is a financial holding company headquartered in Denver. The company operates Colorado Business Bank and Arizona Business Bank.
CoBiz Financial has expected earnings growth of 15.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.6% over the last 60 days. CoBiz Financial has returned 20.5% over the last six months, outperforming the industry it belongs to, which has gained 5.8% over the same period. The stock has a Zacks Rank #1 (Strong Buy).
Summit Financial Group, Inc. (NASDAQ:SMMF) offers community banking and related financial services through its wholly owned subsidiary Summit Community Bank, Inc.
Summit Financial has a Zacks Rank #2 (Buy). The company has expected earnings growth of 21.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.7% over the last 60 days. Summit Financial has returned 18.8% over the last six months, outperforming the industry it belongs to, which has gained 2.9%.
BayCom Corp. (OTC:BCML) provides commercial banking products and services to businesses and individuals via its subsidiary United Business Bank.
BayCom has a Zacks Rank #2. The company has expected earnings growth of 16.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 21% over the last 30 days. BayCom has returned 13.9% over the last six months, outperforming the industry it belongs to, which has gained 5.8% over the same period.
Republic Bancorp, Inc. (NASDAQ:RBCAA) is a financial holding company which is a provider of banking products and services.
Republic Bancorp has a Zacks Rank #2. The company has expected earnings growth of 9.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.7% over the last 30 days. Republic Bancorp has returned 9.7% over the last six months, outperforming the industry it belongs to, which has gained 2.9%.
Citizens Financial Services, Inc. (OTC:CZFS) is the bank holding company for the First Citizens Community Bank.
Citizens Financial Services has a Zacks Rank #2. The company has expected earnings growth of 13.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.5% over the last 30 days. Citizens Financial Services has returned 15.3% over the last six months, outperforming its industry’s decline of 0.6%.
Article syndicated under licence from Zacks via QuoteMedia
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