Zacks Industry Outlook Highlights Bank of America, KeyCorp and BankUnited

For Immediate Release

Chicago, IL – September 20, 2022 – Today, Zacks Equity Research discusses Bank of America Corp. BAC, KeyCorp KEY and BankUnited, Inc. BKU.

Industry: Major Regional Banks

Link: https://www.zacks.com/commentary/1981889/3-major-regional-banks-to-benefit-from-rising-rates-loans

The Zacks Major Regional Banks industry, which bore the brunt of near-zero interest rates and muted lending scenario since the beginning of 2020, is expected to gain from the Federal Reserve’s aggressive interest rate hikes to control inflation. This, along with decent economic growth and modest loan demand, will support banks’ net interest margin and net interest income.

While the macroeconomic ambiguity is resulting in higher credit costs for major banks, restructuring/expansion efforts and digitization will provide support. Hence, Bank of America Corp., KeyCorp and BankUnited, Inc. will likely gain from these favorable industry trends.

About the Industry

The Zacks Major Regional Banks industry includes the nation’s largest banks in terms of assets, with most operating globally. The financial performance of these banks largely depends on the nation’s economic health. As the banks are involved in several complex financial activities, they are required to meet the stringent regulations set by the Federal Reserve and other agencies.

Apart from traditional banking services, which are the source of net interest income (NII), major regional banks provide a wide array of other financial services and products to retail, corporate and institutional clients, both domestic and global. These include credit and debit cards, mortgage banking, wealth management and investment banking, among others. Therefore, a large revenue source for these banks is fees and commissions earned from these services.

3 Major Regional Bank Industry Trends to Keep an Eye On

Aggressive Fed & Decent Loan Demand: Major regional banks benefit from higher interest rates. Hence, the Fed’s aggressive monetary policy stance to tame inflation will support banks’ NII. It must be noted that banks have been reeling under near-zero interest rates since March 2020, which adversely impacted net interest margin (NIM) and NII.

With the market participants expecting the Fed Funds target rate to reach almost 4% by the end of this year, banks will reap huge benefits with higher NIM and NII in the near-to-medium term. This, along with decent economic growth and modest loan demand, will support banks’ top-line growth.

Business Restructuring Efforts: Major regional banks are taking several strategic measures to expand into new avenues and lower their dependence on interest rates. Restructuring of operations is essential for technological advancement and further domestic/global expansion to continue improving profitability. Banks are investing heavily in artificial intelligence and other digital platforms and even partnering/acquiring providers of such services as the demand for these witnessed a substantial rise amid the COVID-19 pandemic.

Major regional banks are also aggressively expanding their footprint outside the United States and into the U.K. and China. Banks are re-evaluating their business structure to improve operating efficiency. The main goal is to simplify operations and do away with non-core, unprofitable ones.

Manageable Asset Quality: For the large part of 2020, major regional banks built extra provisions to tide over unexpected defaults and payment delays owing to the economic slowdown resulting from the coronavirus mayhem. This substantially hurt their financials in the first half of 2020. However, with solid economic growth and the government stimulus package, banks began to release these reserves back into the income statement.

Yet given the present macroeconomic and geopolitical concerns, and rise in loan demand, major banks are building provisions to counter any adverse fallout. Nonetheless, a conservative lending policy and resilience of borrowers will help keep banks’ asset quality solid.

Zacks Industry Rank Indicates Optimistic Prospects

The Zacks Major Regional Banks industry is a 15-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #87, which places it in the top 35% of nearly 253 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since January 2022-end, the industry’s earnings estimates for the current year have been revised 1.3% upward.

Before we present a few major bank stocks that you may consider on rising interest rates and other favorable developments, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Underperforms Sector and S&P 500

The Zacks Major Regional Banks industry has underperformed both the S&P 500 composite and its own sector over the past year. While the stocks in this industry have collectively lost 14.7% over the period, the Zacks S&P 500 composite has declined 12.5% and the Zacks Finance sector has fallen 10.4%.

Industry's Valuation

One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.

The industry currently has a trailing 12-month P/TBV of 1.86X. This compares with the highest level of 2.68X, lowest of 1.21X, and median of 2.17X over the past five years. The industry is trading at a huge discount compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 composite is 9.95X.

As finance stocks typically have a lower P/TBV ratio, comparing major regional banks with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV came in at 4.38X. This is above the Zacks Major Regional Banks industry’s ratio.

3 Major Regional Bank Stocks Worth a Look

Bank of America: With total assets worth $3.11 trillion as of Jun 30, 2022, Bank of America is one of the largest financial holding companies in the United States. The company provides a diverse range of banking and non-banking financial services and products across North America and globally.

BAC is well-poised to benefit immensely from higher interest rates. The company’s balance sheet is highly asset-sensitive, and rising rates will support top-line growth. Provided that loans grow modestly and rates in the forward curve materialize, management projects NII in the third quarter of 2022 to rise by at least $900 million or $1 billion sequentially. Further, NII is likely to grow at a faster pace on a sequential basis in the fourth quarter.

Bank of America continues to align its banking center network according to customer needs. These initiatives, along with the success of Zelle and Erica, have enabled it to improve digital offerings and cross-sell several products, including mortgages, auto loans and credit cards. The acquisition of Axia Technologies (March 2021) has further strengthened its healthcare payments business.

Prudent cost management continues to support this Zacks Rank #3 (Hold) bank’s financials. Its expense-saving plan – Project New BAC (launched in 2011) – helped improve overall efficiency. Over the last several quarters, the company has incurred an average of $15 billion in expenses, despite undertaking strategic growth initiatives. Though total non-interest expenses rose in 2021, management expects the same for 2022 to be relatively stable.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Post the clearance of the 2022 stress test, Bank of America announced a dividend hike of 4.8% in July 2022, following a 17% hike in July 2021. In October 2021, the company's share repurchase plan of $25 billion was renewed. As of Jun 30, 2022, $16.4 billion worth of shares were left to be repurchased.

With a market cap of $274.2 billion, Bank of America’s efforts to improve revenues, strong balance sheet and expansion into new markets will support financials. Over the past month, the Zacks Consensus Estimate for earnings has been revised marginally lower for 2022. Shares of BAC have declined 23.3% so far this year.

KeyCorp: Cleveland, OH-based KeyCorp offers a wide range of products and services, including commercial and retail banking, commercial leasing, investment management, consumer finance and investment banking products in 15 states through a network of 978 branches and nearly 1,284 ATMs.

This Zacks Rank #3 company has been witnessing robust organic growth. Though tax-equivalent revenues declined in 2019 and the first six months of 2022, the same witnessed a CAGR of 3.7% over the last five years (2017-2021). During the same period, loans witnessed a CAGR of 4.2% and deposits saw a CAGR of 9.7%. Solid deposit balances and an improvement in loan demand, along with the company’s efforts to strengthen fee income, are expected to keep supporting the top line.

With the Fed Reserve having raised rates four times this year, with more expected to come, KeyCorp’s NIM is likely to witness decent growth with support from solid loan demand. Also, as demand for digital banking services continues to rise, the company has been consolidating its branch network, with management looking for opportunities to right-size its footprint.

KeyCorp’s business restructuring efforts are commendable and provide immense support to fee income. In May, the company acquired GradFin, strengthening its digital offering capabilities. Last year, it acquired a B2B-focused digital platform, XUP Payments and a data analytics-driven consultancy firm, AQN Strategies LLC. These, along with several past buyouts/expansion initiatives, are expected to strengthen its product suites and market share.

A strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting KeyCorp’s growth. Also, in November 2021, the company hiked its quarterly cash dividend by 5.4% to 19.5 cents per share. In July 2021, it announced a new share repurchase authorization of up to $1.5 billion through the third quarter of 2022. As of Jun 30, 2022, $746 million worth of shares were left to be repurchased.

KeyCorp has a market cap of $16.5 billion and has lost 23.5% in the year-to-date period. Over the past 30 days, the Zacks Consensus Estimate for earnings has remained unchanged for 2022.

BankUnited: With total assets worth $36.6 billion as of Jun 30, 2022, BankUnited has been growing organically, driven by strong loans and deposit balances. This Miami Lakes, FL-based company’s primary banking markets are Florida and the Tri-State market of New York, New Jersey and Connecticut. As of Jun 30, 2022, it had 60 banking centers across 12 Florida counties, four in the New York metropolitan area and one in Dallas, TX.

With decent loan growth and BankUnited's efforts to improve fee income, its top line is expected to rise going forward. The company has been changing its deposit mix to further support revenues. Management has been strategizing on increasing low-cost deposits, with a persistent rise in non-interest-bearing demand deposits (33.9% of total deposits as of Jun 30, 2022), as reflected in a six-year (2016-2021) CAGR of 24.8%.

Further, with the central bank expected to continue increasing rates this year, BKU’s NII and NIM are likely to witness an uptrend in the near term. In fact, the company’s NIM increased in the first six months of 2022, driven by rising interest rates.

The company’s capital deployment activities are impressive. For the first time, BKU hiked its quarterly dividend by 10% to 23 cents per share in February 2020 and then by 8.7% to 25 cents per share in March 2022. It has a share repurchase program in place too. This May, the company's board of directors authorized the repurchase of up to an additional $150 million in shares, with no expiration date. As of Jun 30, 2022, almost $150 million worth of shares were left to be repurchased.

With a market cap of $2.9 billion, BKU’s efforts to improve revenues and strength in the balance sheet will support financials. Over the past month, the Zacks Consensus Estimate for earnings has remained unchanged for 2022. This Zacks Rank#2 (Buy) stock has lost 11% so far this year.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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