The stock market has been under pressure due to surging inflation, which accelerated 9.1% year-over-year in June, exceeding the 8.8% Dow Jones estimate and the Federal Reserve’s aggressive interest rate hikes. The central bank is expected to raise the interest rates by 75 basis points in its meeting this week, raising the odds of the economy slipping into a recession.
Also, U.S. business activity decreased in July for the first time in approximately two years, with a sharp slowdown in the service sector. Steve Sosnick, the chief strategist at Interactive Brokers, said, “don’t be fooled” by short rallies, as these recent increases were just a part of the market where “volatility works in both directions.”
Even though the banking sector benefits from rising interest rates, not all companies are expected to benefit from this. We think fundamentally weak bank stocks, First Republic Bank (FRC), Prosperity Bancshares, Inc. (PB), and Pathward Financial, Inc. (CASH), are best avoided now.
First Republic Bank (FRC)
FRC provides private banking, private business banking, and private wealth management services to clients in metropolitan areas in the United States. It has two operational segments, Commercial Banking and Wealth Management.
For the second quarter ending June 30, 2022, FRC's total non-interest expenses increased 19.8% year-over-year to $913.00 million. For the three months ended June 30, 2022, FRC’s cash and cash equivalent declined 19.6% from its previous period to $6.24 billion. The total wealth management assets were $246.8 billion as of June 30, 2022, down 10.0% compared to the prior quarter.
The stock has declined 23.3% year-to-date and 26.5% over the past nine months.
FRC's POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, which translates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
FRC has rated an F grade for Value and a D for Quality. Within the F-rated Money Center Banks industry, it is ranked last of 11 stocks.
Click here for additional FRC POWR Ratings for Growth, Sentiment, Stability, and Momentum.
Prosperity Bancshares, Inc. (PB)
PB provides financial products and services to businesses and consumers. It accepts various deposit products, such as demand, savings, money market, time accounts, and certificates of deposit.
In the second quarter ended March 31, 2022, PB’s total interest income declined 8.5% year-over-year to $248.88 million. Its net income decreased 8.2% from its prior-year quarter to $122.33 million. For the three months ended March 31, 2022, the company’s cash and due from banks declined 38.8% from its previous period to $1.56 billion.
The consensus EPS estimate of $1.39 represents a year-over-year decline of 1.7% for the second quarter ending June 2022. The company's shares have plunged 4.9% over the past six months.
PB’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. The stock also has a D grade for Value and Quality. In the D-rated Southwest Regional Banks industry, it is ranked 25 of 28 stocks.
In addition to the POWR Ratings grades I have just highlighted, you can see the PB rating for Momentum, Growth, Stability, and Sentiment here.
Pathward Financial, Inc. (CASH)
CASH offers various banking products and services in the United States. It operates through three segments: Consumer; Commercial; and Corporate Services/Other. The company offers demand deposit accounts, savings accounts, money market savings accounts, and certificate accounts.
CASH’s total non-interest income declined 3.2% year-over-year to $109.77 million for the second quarter ending March 31, 2022. Its net income decreased 20% from its year-ago value to $49.25 million, while its EPS came in at $1.66, down 9.8% from its prior-year quarter.
Analysts expect CASH's revenue to decline 0.7% year-over-year to $130.08 million in the third quarter ending June 2022. The consensus EPS estimate of $0.92 represents a year-over-year decline of 23.7% for the third quarter ending June 2022. The company's shares have plunged 29.4% year-to-date and 32.9% over the past nine months.
CASH’s poor prospects are also apparent in its POWR Ratings. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. Additionally, it has a D grade for Sentiment and Growth.
CASH is ranked #40 of 41 stocks in the C-rated Midwest Regional Banks industry. Click here to see the additional POWR Ratings for CASH (Quality, Stability, Value, and Momentum).
FRC shares were trading at $155.07 per share on Tuesday afternoon, down $3.35 (-2.11%). Year-to-date, FRC has declined -24.68%, versus a -17.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Spandan Khandelwal
Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing.
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