Digitization And Fintech To Boost U.S. Banks: 5 Picks

Banks in the United States have gained significantly from a rising rate environment, growth in loans and President Trump’s tax cuts. However, use of fintech, particularly in transaction and payments, has been pivotal in reducing costs for the banks in America and improving banks’ return on equity.

Furthermore, digitization has also driven inorganic growth as well as bottom-line results for the broader banking industry. Moreover, U.S. banks stand to benefit the most from the race toward digitization.

The banking industry’s return to shareholders has easily outperformed the broader market since November 2016. In other words, the S&P Banks Select Industry Index (SPSIBK) has returned upward of 33% since November 2016, easily surpassing the S&P 500’s rally over the same period. Under such circumstances, betting on bank stocks seems prudent.

Digitization Will Lead to Economies of Scale

Banking, as we always knew it, has undergone significant transformation in the recent past. As a rule of thumb in banking, more the number of branches, higher the share of deposits. The business model was fairly simple.

However, this status quo has been challenged by digital branding. Banks now make excessive use of advanced analytics as well as machine learning to improve the customer experience, revenues and cost efficiency. To put things into perspective, five of the biggest banks in the United States have captured more than 40% share of the total domestic deposits since 2014, on the back of digitization alone.

Meanwhile, regional banks had a stupendous run in 2018 because they could capitalize on their digitization efforts to boost economies of scale which led to significant decline in costs. Per Federal Deposit Insurance Corporation, efforts to digitize boosted commercial and savings banks’ net income to $62 billion in the third quarter of 2018 alone.

Fintech to Revolutionize Payment Processing in 2019

The growing influence of fintech has helped boost net interest margin (NIM) and loan growth for banks across the globe. As a matter of fact, global banking industry’s NIM grew to more than 3.5% by the end of 2018.

Financial transaction service providers such as PayPal (NASDAQ:PYPL) , Apple’s (NASDAQ:AAPL) Apple Pay platform and Amazon’s (NASDAQ:AMZN) Amazon GO have been posing threats to retail bankers by consistently innovating and attracting more active users by improving customer experience. To adopt to changing circumstances and catch up to the fintech race, incumbents have been switching to fintech to reshape their payment methods.

Some of the biggest banks in America have invested generously in creating their own online lending platforms, JPMorgan Chase’s (NYSE:JPM) Finn being an example.In an age where more than 70% of transactions are taking place online, traditional payment processing methods will prove to be disruptive to the banking businesses across the world.

It goes without saying that cashless and easy payment options not only increase the transactional frequency, but also the customer base of regional players to international audience.

5 Best Choices

While Trump’s tax cuts have benefited America’s banks immensely, it is the race to digitization which has made banking a cost-effective business recently. Moreover, banks are increasingly moving in to the fintech space either by establishing stand-alone digital banks or partnering with service providers. Currently, 36% of all the personal loans in the United States have resulted from the use of fintech.

In this context, we have selected five bank stocks that are expected to gain from these factors. These stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). For each of these stocks, the price-to-earnings ratio (P/E) is lesser than the industry average. You can see Zacks Investment Research

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Written By: Zacks Investment Research