Three Regional Banks to Watch as Earnings Roll In
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three regional bank stocks. With banks set to report earnings within the next month, should you consider the stocks of Bank of Montreal (BMO), Huntington Bancshares Inc. (HBAN) and U.S. Bancorp (USB)?
Regional Bank Stocks Recent News
The global economy remains fragile going into 2023. Uncertainties abound due to a less-than-ideal combination of factors: Russia’s invasion of Ukraine, supply chain disruptions, the meteoric rise in inflation and tightening monetary policy across the world.
Over the last year, banks have benefited from rising interest rates, which have increased their net interest income (NII). This is likely to continue as the Federal Reserve plans to raise interest rates further in 2023 and potentially into 2024.
However, raising interest rates isn’t all good for banks. As rates rise, so do banks’ costs on deposits. In addition, the increased cost of money has put a damper on new stock and debt issues as well as mergers and acquisitions (M&A), areas of business where Wall Street banks have traditionally earned hefty fees. Additionally, the Fed’s aggressive tightening raises the risk that the economy will fall into a recession. With the dimmer economic outlook, banks are bracing for headwinds by increasing their reserves for expected losses, as credit quality typically suffers during economic downturns. Due to this, fourth-quarter earnings expectations are mostly lower than the results from one year ago.
Overall, businesses such as retail banking should fare well in 2023 due to higher NII from rising interest rates, but investment banking performance will probably be mixed due to languishing underwriting and M&A advisory activities. The near-term future of the economy will play a large role in the success of banks.
Grading Regional Bank Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been indicated by research and real-world investment results to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three regional bank stocks — Bank of Montreal, Huntington Bancshares and U.S. Bancorp — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Regional Bank Stocks
What the A+ Stock Grades Reveal
Bank of Montreal (BMO) is a Canada-based financial services provider. The bank provides a range of personal and commercial banking, wealth management, global markets and investment banking products and services. The bank conducts its business through three operating groups: personal and commercial banking, BMO Wealth Management and BMO Capital Markets. The personal and commercial banking business includes two retail and business banking operating segments, such as Canadian personal and commercial banking and U.S. personal and commercial banking. BMO Wealth Management business provides a full range of clients, from individuals and families to business owners and institutions, offering a wide spectrum of wealth, asset management and insurance products and services. BMO Capital Markets provides products and services to North American and international corporate, institutional and government clients through its investment and corporate banking and global markets divisions.
Bank of Montreal has a Momentum Grade of C, based on its Momentum Score of 49. This means that it is average in terms of its weighted relative strength over the last four quarters. This score is derived from an above-average relative price strength of 5.0% in the most recent quarter and 2.9% in the fourth-most-recent quarter, offset by a below-average relative price strength of –3.0% in the second-most-recent quarter and –6.8% in the third-most-recent quarter. The scores are 60, 50, 44 and 60 sequentially from the most recent quarter. The weighted four-quarter relative price strength is 0.6%, which translates to a score of 49. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, Bank of Montreal has an Earnings Estimate Revisions Grade of D, which is negative. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Bank of Montreal reported an earnings surprise for fourth-quarter 2022 of –1.0%, and in the prior quarter reported an earnings surprise of –1.5%. Over the last month, the consensus earnings estimate for the first quarter of 2023 has decreased from $3.233 to $3.211 per share due to one upward and five downward revisions. Over the last three months, the consensus earnings estimate for full-year 2023 has decreased 0.7% from $13.692 to $13.600 per share due to two upward and 10 downward revisions.
The company has a Value Grade of C, based on its Value Score of 52, which is considered average. This is derived from a high price-to-sales (P/S) ratio of 3.29 and a price-to-free-cash-flow (P/FCF) ratio of 80.6, which rank in the 66th and 88th percentiles, respectively. Bank of Montreal has a Growth Grade of B based on a score of 79. The company has had strong five-year annual sales growth.
Huntington Bancshares Inc. (HBAN) is a diversified regional bank holding company. Its segments include commercial banking; consumer and business banking; vehicle finance; and regional banking and the Huntington Private Client Group (RBHPCG). The commercial banking segment provides a set of product offerings and capabilities to middle market, large corporate, specialized industries and government/public sector customers. The consumer and business banking segment includes home lending, which provides an array of financial products and services to consumer and small business customers. The vehicle finance segment includes products and services that provide financing to consumers. The RBHPCG segment consists of private banking, wealth and investment management and retirement plan services. It has over 1,092 full-service branches and private client group offices located in Ohio, Colorado, Illinois, Indiana, Kentucky, Michigan, Minnesota, Pennsylvania, West Virginia and Wisconsin.
The company has a Value Grade of B, based on its Value Score of 66, which is considered to be good value. Higher scores indicate a more attractive stock for value investors and, thus, a better grade.
Huntington Bancshares’ Value Score ranking is based on several traditional valuation metrics. The company has a rank of 14 for shareholder yield, 34 for the price-to-free-cash-flow ratio and 35 for the price-earnings (P/E) ratio (with the higher ranks being better for value). The company has a shareholder yield of 5.6%, a price-to-free-cash-flow ratio of 10.6 and a price-earnings ratio of 11.3. The company has a price-to-sales ratio of 3.97, which translates to a rank of 71.
The Value Grade is based on the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above, along with the price-to-free-cash-flow ratio and price-to-book-value (P/B) ratio. The rank is scaled to assign higher scores to stocks with the most attractive valuations and lower scores to stocks with the least attractive valuations.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Huntington Bancshares has a Quality Grade of B with a score of 79. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its buyback yield, F-Score and return on invested capital. Huntington Bancshares has a buyback yield of 1.4%, an F-Score of 7 and a return on invested capital of 86.2%. The sector median F-Score and return on invested capital are 3 and 44.5%, respectively. However, Huntington Bancshares ranks poorly in terms of its Z-Score, in the 31st percentile.
Huntington Bancshares has a Momentum Grade of C, based on its Momentum Score of 47. This means that it is average in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative price strength is 0%.
U.S. Bancorp (USB) is a financial services holding company. It provides a range of financial services, including lending and depository services, cash management, capital markets and trust and investment management services. It also engages in credit card services, merchant and automated teller machine (ATM) processing, mortgage banking, insurance, brokerage and leasing. Its banking subsidiary, U.S. Bank National Association, is engaged in the general banking business and offers commercial and consumer lending, lending services, depository services and ancillary services. Its non-banking subsidiaries offer investment and insurance products to the company’s customers principally within its domestic markets and fund administration services to a range of mutual funds and other funds. The company’s lines of business are corporate and commercial banking, consumer and business banking, wealth management and investment services, payment services and treasury and corporate support.
U.S. Bancorp has a Quality Grade of C with a score of 57. The company ranks strongly in terms of its return on assets, F-Score and buyback yield. U.S. Bancorp has a return on assets of 1.1%, an F-Score of 6 and a buyback yield of –0.2%.
U.S. Bancorp has a Momentum Grade of C, based on its Momentum Score of 41. This means that it is average in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative price strength is –2.0%.
U.S. Bancorp reported a positive 1.0% earnings surprise for third-quarter 2022, and in the prior quarter reported an earnings surprise of 2.1%. Over the last month, the consensus earnings estimate for the fourth quarter of 2022 has decreased from $1.192 to $1.166 per share due to five upward and seven downward revisions. Over the last month, the consensus earnings estimate for full-year 2022 has decreased from $4.431 to $4.403 per share, based on five upward and seven downward revisions.
The company has a Value Grade of B, based on its Value Score of 71. This is derived from a price-earnings ratio of 11.3 and a shareholder yield of 3.9%, which rank in the 35th and 20th percentiles, respectively. U.S. Bancorp has a Growth Grade of B based on a score of 64. The company has had above-average sales growth over the last five years.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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