Bank stocks may be a buy, but only if investors are willing to be patient.
With the KBW Nasdaq Bank Index (ticker: BKX) off more than 40% this year—roughly double the loss in the S&P 500 —there is no question that the sector is in pain. First it was the fear that the coronavirus would lead to an economic slowdown, then it was the confirmation of the fact.
The Federal Reserve’s moves to keep credit flowing—including slashing interest rates by 1.5 percentage points in the course of two weeks—further hampered the biggest banks, ensuring that net interest income, and earnings, would plunge. Over the past few weeks, several banks have traded below their book value and investors hoping for capital return are seeing those hopes dashed after eight of the nation’s biggest banks said they were halting buybacks, causing some to question whether dividends are still safe.
Recent market volatility has caused some to have flashbacks to the financial crisis of 2008-09. Inviting further comparisons to that time is the fact that eight of the largest U.S. banks, including JPMorgan Chase (JPM) and Goldman Sachs (GS) said Monday that they have borrowed from the Fed’s discount window. But rather than the fear and necessity that drove them to do so then, the banks now say they did it “to encourage its use by other financial institutions,” according to a statement by the Financial Services Forum.
“The industry has consistently passed Fed stress tests, which assume a severely adverse scenario,” Jason Goldberg, analyst at Barclays said in a note Tuesday, adding that even in a “challenging scenario,” banks in his coverage universe remain profitable.
And even against this backdrop in which a recession seems almost certain, analysts at Baird are still seeing specific opportunities in the nation’s big banks.
“While recession is now closer to our base case for 2020, we are optimistic there will be a recovery and see 30%-50% upside in bank stocks if investors can hold on until then,” David George, senior research analyst at Baird, said in a note on Tuesday in which he raised his ratings on Bank of America (BAC), U.S. Bancorp (USB), and Truist Financial (TFC).
U.S. Bancorp is compelling because it faces lower interest rate and credit risk than peers and it is trading at its lowest price to tangible book value multiple in more than a decade, by George’s measure.
Truist, which is the result of a merger between BB&T and SunTrust, will realize synergies from its combination “in an extended low growth/low rate macro environment,” that should drive earnings, George wrote. He said management recently reiterated that it still expects to achieve $1.6 billion in cost savings by the end of 2022.
On Bank of America, George said it is equipped to face tougher economic times thanks to having a diversified franchise and has grown responsibly. The bank, like many others, is sure to see a dip in net interest income and wealth-management fees but some of that will be offset by trading and mortgage lending.
Write to Carleton English at firstname.lastname@example.org