Bank Stocks To Outdo Broader Markets This Year: 5 Picks
Zacks Investment Research | Aug 16, 2017 09:26PM ET
Bank stocks have, so far, underperformed the broader market this year. Investment banking giant Goldman Sachs Group Inc (NYSE:GS) , however, believes that the banking sector will outdo the markets in the rest of this year on rising dividends and stock buybacks. And why not? Banks have cleared the Federal Reserve’s stress test with flying colors this year. They have adequate capital cushion, which can be used for paying out dividends and repurchasing stocks.
Also, a rising interest rate environment will make it a cakewalk for banks. Higher rates help banks charge more interest on all loans, which expands the net interest margin (NIM). The White House’s intention to ease banking regulations are, further, likely to spur lending activities, while relaxed rules will help banks make use of surplus funds and grow inorganically through mergers and acquisitions.
Decline in mortgage and trading revenues are, however, eating into bank’s profits. But, softer regulations bode well for refinancing activities, which will in due course drive mortgage revenues. Given such positive trends, investing in sound bank stocks seems judicious.
Banks to Outpace on Rising Dividends & Bigger Share Buybacks
Bank stocks are set to scale higher on rising dividends and bigger share buybacks, as per Goldman’s analysts. The financial behemoth expects the bank sector to ramp up its dividends by 17% on an annual basis over the next two years. Such acceleration in dividend growth will attract equity income investors.
When it comes to disbursement of capital to shareholders, most of the banks will be able to pay out 100% of their anticipated net income in the next four quarters, much higher than last year’s payout of around 65%. It will also turn out to be the first time since the financial crisis in 2008 that banks will be able to return almost the entire annual profit to shareholders.
In addition, strategist David Kostin stated that the recent positive Fed “stress test” results will help banks increase share buybacks, which in turn will improve earnings per share, return on equity and share prices (read more: Zacks Investment Research
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