These Banking Stocks Have Great Upside Potential

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The first quarter of 2017 ended on a positive note for the overall market. The banking stocks in particular, were investor favorites during this period. We are now eagerly waiting to see the financial performance of the banking stocks subsequent to the two rate hikes in three months and a gradually improving operating environment.

These along with positive developments on domestic and global fronts helped the overall market rally. The Dow Jones Industrial Average, NASDAQ Composite index and S&P 500 rose 3.9%, 8.9% and 4.7%, respectively, in the first quarter.

Before we check out how the earnings are expected to be for the banking stocks, let’s first dig into the factors that influenced the banks.

Factors at Play

Unlike the past couple of years, 2017 began on a positive note for the banks, as the Federal Reserve announced rate hike in mid-Dec 2016. Apart from this, an improving economy and the Fed’s projections of three rate hikes kept the optimism alive.

Additionally, President Trump’s promises of easing regulatory restrictions and lower tax rates supported the bank rally. Also, mortgage rates continued to move higher as money was pulled out of the bond market and yields on 10-year Treasuries climbed.

Moreover, the Fed’s announcement of a rate hike in March further reinforced the banking stocks’ financial performance in the quarters ahead. But speculations of delayed implementation of Trump’s financial policies as well as rise in bond prices led to a sell-off in the banking stocks in the latter half of the month.

This marginally dampened the overall performance of the stocks in the quarter. S&P Regional Banks Select Industry Index and SPDR S&P Regional Banking ETF (KREFree Report) ended the quarter in red, with both recording a fall of over 1.7%.

Earnings Projections for Q1

Nonetheless, one should not worry too much about this dismal price performance. Improved earnings results along with favorable operating backdrop will continue to support banks’ financials.

Per our latest Earnings Outlookreport, earnings growth for Banks & Thrifts is expected to be 14.9% in first-quarter 2017. Earnings growth is expected to be 5.6% for the overall Finance sector.

Therefore, to cash-in the earnings performance this is the right time to add a few stocks that have been part of the banking stock rally and have further upside potential.

Choosing the Winning Stocks

We have taken the help of the Zacks Stock Screener to select the favorable stocks. To shortlist the stocks from the vast universe of banking, we have picked stocks that carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

To further filter the list, we selected stocks that gained 15% or more over the last 12 weeks. Also, these stocks are expected to witness 10% or more earnings growth in the first quarter.

Here are the three stocks that fulfilled all these criteria:

Farmers & Merchants Bancorp, Inc. (FMAOFree Report) , providing commercial banking, retail banking and other financial services to individuals and small businesses, sports a Zacks Rank #1. Shares of the company jumped 20.2% in the first three months of 2017. Further, the company is anticipated to witness earnings growth of 18.5% in the first quarter.

Park Sterling Corporation (PSTBFree Report) , providing various banking products and services, carries a Zacks Rank #2. In the first three months of 2017, the company recorded 16.4% rise in its share price. Also in the first quarter, the company is expected to record 12.5% earnings growth.

Two River Bancorp (TRCBFree Report) , offering banking services to small and medium-sized businesses, professionals and individual consumers, sports a Zacks Rank #1. The company shares jumped 29.2% in the first three months of 2017. Moreover, the company is projected to report 15% earnings growth in the first quarter.