It’s undeniable that the potential political upside in the Trump presidency and the Fed’s commitment to raise rates faster led bank stocks to reach too high too fast. But it can be said that the industry has gained enough footing on its underlying structure to please investors.

Many analysts remain skeptical about Trump meeting his policy goals that could actually benefit the industry. Bank stocks may witness a sharp pullback in case the key expectations don’t get fulfilled.

However, not everything can go wrong. President Trump’s business friendliness will definitely make the growth path better for banks, if not free of all barriers.

The Fed’s keeping its commitment to raise rates faster is also important for banks, as a higher rate environment is crucial in offsetting whatever challenges they face in the future. Actually, higher rates would allow banks to charge more interest on mortgages, credit cards, auto leases and all other forms of loans. In other words, banks’ net interest margin will expand.

Only time will tell whether bank stocks can maintain or uplift the level they reached. For now, the benefit that is clearly visible is the uncertainty-induced market volatility that is boosting banks’ trading revenues.

In any case, there are underlying factors to support the performance of bank stocks in the future.

How Capable Are Banks to Grow on Their Own?

Proactive reorganization of businesses by reducing expenses, enhanced focus on non-interest revenue sources, technical affluence, ability to capitalize on economic growth through enhanced cross-selling opportunities and many more positive factors might help the banks perform well in the upcoming quarters.

In fact, these were the factors that helped banks progress on the earnings front over the last few quarters despite their vulnerability to a flattening yield curve, regulatory hindrances, global growth instability, commodity price recession and the Brexit aftermath.

Banks have learned to take the low-rate environment in stride and have earned significant fundamental strength by reorganizing their business models. Moreover, while global economic uncertainty is still weighing on the prospect of a quicker rate hike, the domestic economic recovery and its resilience should be sufficient to convince the Fed to tighten monitory policy at a faster pace.

With increased affordability of consumers and businesses to borrow money, the chance of interest rates rising faster has increased. And by their very nature, banks thrive in a rising rate environment. Squeezing net interest margins, which have kept banks’ top line under pressure for long, has already started taking a turn.

Moreover, sound capital levels that banks generated by meeting the strict regulatory requirements should help them easily absorb likely credit costs – such as expenses related to exposure to the troubled oil and gas sector. High credit risk in banks’ loan portfolios led to high loan-loss provisions in the past, but provisions are currently at very low levels. While the likely policy changes by the Trump administration could impact banks’ credit profile, any possible disorder should be manageable for a decent period with the capital power.          
Though the earnings performance over the last few years has failed to garner investors’ confidence, the results depict banks’ efforts in pairing up aggressive actions (like creating new revenue sources) with defensive measures (like expense control) to tide over persistent challenges. Moreover, banks have learned how to adapt to a changing landscape and deal with crises. They can now dodge pressure from the operating environment more easily.

Banks are trying to reorganize risk management practices to address potential solvency issues from rising interest rates. Asset-quality troubles are also being addressed by divesting segments containing nonperforming assets.

(Check out our latest U.S. Banks Stock Outlook for a more detailed discussion on the business trends.)

Loans and Deposits Promise Growth

Uncertainty related to politics and apprehension over policy changes have resulted in sluggish loan growth for most U.S. banks in the last few months, and this trend may continue for some time. But overall demand for loans has been rising with recovering domestic economic conditions and easier lending standards.

Both consumer and business loans have increased significantly in recent years on the back of an improved housing market, lower unemployment, higher wage growth and enhanced consumer confidence.

Further, the speculation of a higher-rate environment any time soon will drive borrowers to apply for loans well ahead of time, leading to increased demand.

On the deposit side, less-levered consumers and businesses will continue to support strong deposit levels. Also, high levels of corporate cash holdings remain favorable for deposit growth.

Efficiency Efforts to Drive Growth

Along with the adoption of advanced technologies to enhance cyber security, banks are resorting to increased use of analytics to drive efficiency. This could help them to better formulate strategies and enhance the top line of different business segments.

While analytics can elevate their expenses in the quarters ahead, concerted efforts to cut expenses should be enough to strike a balance.

Problem Banks on FDIC’s List Lessen
 
The fourth quarter of 2016 witnessed continued improvement in the FDIC's "Problem Bank List." The list contained 123 names as of Dec 31, 2016, down from 132 as of Sep 30, 2016. In fact, the current number represents an over 86% decline from the post-crisis high of 888 on Mar 31, 2011.

This undoubtedly reflects improvement, but the number is still high considering the occurrence of the financial crisis nearly eight years back. There were only 76 banks on the Problem List at the end of 2007, just before the crisis.

The number of bank failures has nonetheless declined every year since 2010. There have been just three bank failures so far in 2017 compared with five failures in 2016 (versus eight in 2015, 18 in 2014, 24 in 2013, 51 in 2012, 92 in 2011 and 157 in 2010). The recent numbers are almost close to the average annual failure rate, which indicates maximum strength in the banking system.

Stocks Worth Buying Right Now

While banks’ rally since Trump's victory has made the valuation slightly stretched when compared with the industry’s own range, the factors that the industry are expected to benefit from might lead it to further gains in the near term. While the concerns should not be overlooked, one can consider buying stocks that carry a favorable Zacks Rank.

Here are a few top-ranked bank stocks you may want to consider:

Bank of America Corp. (BAC Quick QuoteBAC - Free Report) : This Zacks Rank #2 (Buy) stock gained about 49% over the last six months. The stock’s earnings estimates for the current fiscal year have been revised 1.2% upward over the last 60 days.

Comerica Inc. (CMA Quick QuoteCMA - Free Report) : This Zacks Rank #2 stock gained nearly 43% over the last six months. Earnings estimates for the current fiscal year have been revised 1.7% upward over the last 60 days.

Sterling Bancorp : A 3.1% upward revision in earnings estimates for the current fiscal year over the last 60 days lead to a Zacks Rank #1 (Strong Buy) for this stock. The price of this stock surged nearly 32% over the last six months.

Preferred Bank (PFBC Quick QuotePFBC - Free Report) : This Zacks Rank #1 stock gained nearly 40% over the last six months. Earnings estimates for the current year have been revised 5.6% upward over the last 60 days.

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