Bank Stocks That Outperformed the S&P 500 in 2014 - Analyst Blog

Since the beginning of 2014, the overall operating environment for banks had been quite tough. Nevertheless, banking stocks showed strong resilience and continued to confront challenges valiantly. Despite weakness in mortgage banking and capital market businesses, a modest improvement in investment banking, along with cost-control measures (streamlining operations and job cuts) and balance sheet restructuring, helped banks maintain profitability.

This was further evident from the overall banking stock performance. While the year-to-date gain of S&P 500 was nearly 13.5% (as of Dec 22, 2014), S&P 500 Banks (Industry Group) returned 14.1%.

Fundaments at Play

The prevailing low interest rate environment continued to curb net interest margin growth, thereby putting pressure on net interest income. Moreover, given the increased regulatory restrictions, banks found it difficult to generate non-interest income. Consequently, overall revenue growth suffered. Also, several mandatory defensive measures, like maintaining higher capital ratios, are restricting growth.

Additionally, legal costs became the major earnings dampener for big banks such as Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Wells Fargo & Company (WFC). Though banks are making efforts to move past their litigation headwinds, we do not expect such expenses to abate soon.

Nevertheless, credit quality -- one of the most important performance indicators -- kept on improving, backed by low interest rates, which are expected to prevail at least til mid-2015. Further, the banks witnessed improving trends in mortgage refinancing, auto lending and credit cards, which were able to offset lower mortgage demand to some extent. Also, a boom in M&A and IPO activities led to robust investment banking business.

Earnings Performance

Overall earnings performance of banks has been modest. Better-than-expected earnings remained the key driver of their performance, but this was largely attributable to overly conservative estimates.

On a year-over-year basis, performance of Major Banks remained disappointing, with earnings declining 13.6%, 2.7% and 11% for first quarter, second quarter and third quarter, respectively.

Nonetheless, performance of Banks & Thrifts was impressive. Though earnings declined 6.6% year over year in the first quarter, a steady improvement was witnessed over the last two quarters, with respective growth of 8.9% and 18.7%.

3 Banks That Returned More than S&P 500

Bank of the Ozarks, Inc. (OZRK), headquartered in Little Rock, AR, operates as the bank holding company for Bank of the Ozarks and provides a wide range of retail and commercial banking services. As of Sep 30, 2014, the company had 165 offices in Arkansas, Georgia, Texas, North Carolina, Florida, Alabama, South Carolina, New York and California.

Bank of the Ozarks presently holds a Zacks Rank #2 (Buy) and has gained 29.03% year-to-date. The company also has an average earnings surprise of 3.74% over the trailing four quarters.

Signature Bank (SBNY) provides various business and personal banking products and services. The New York-based company operates 27 private client offices located in the city's metropolitan area.

Signature Bank also carries a Zacks Rank #2 and has gained 15.12% year-to-date. Over the trailing four quarters, it delivered an average earnings beat of 4.4%.

Western Alliance Bancorporation (WAL) operates as the bank holding company for Western Alliance Bank that provides various banking and related services. Headquartered in Phoenix, AZ, the company offers services in Nevada, Arizona and California.

Western Alliance Bancorporation sports a Zacks Rank #1 (Strong Buy) and has gained 14.71% year-to-date. Also, over the trailing four quarters, the company posted an average earnings surprise of 7.21%.

Road Ahead

With a top Zacks Rank and impressive earning streak, we expect these stocks to outperform S&P 500 in 2015 as well. Further, with the U.S. economy showing signs of revival, the macroeconomic conditions are expected to support banks' growth in the year to come. Hence, it will be a good decision to invest in these banks right away.

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