The big banks are set to report first-quarter earnings in about two weeks, and Wall Street analysts are finding themselves at a loss to guess how they will fare during the coronavirus pandemic—but it hasn’t stopped them from trying to look through to the other side.
“In the battle of fear and greed, fear has a commanding lead that has driven bank stock valuations down to the average level from the [global financial crisis], creating an investment opportunity over 1-2 years,” Wells Fargo Securities analyst Mike Mayo wrote Tuesday. He cut earnings estimates for the nation’s largest banks while noting “the long-term bull case remains intact.”
Mayo wasn’t alone in noting the difficult times ahead for the big banks, which have sold off aggressively despite being better-capitalized and more-equipped to weather a crisis than they were in the run-up to the global financial crisis of 2008-09.
“This earnings preview is the most difficult to write in our careers because there is simply no precedent,” Chris Kotowski of Oppenheimer wrote in a note Tuesday, trying to draw comparisons to other downturns he experienced in his career: the 1987 market crash, the savings and loan crisis, 9/11, and the global financial crisis. “This is just different.”
Different it may be, but Kotowski is finding comfort in Newton’s laws of motion.
“[One] needs to remember that every major economic action will at some point force an equal and opposite reaction,” he wrote, upgrading U.S. Bancorp (ticker: USB) to Outperform, while reiterating his bullish ratings on Bank of America (BAC), Citigroup (C), CIT Group (CIT), Goldman Sachs Group (GS), and Morgan Stanley (MS).
Banks sold off aggressively in the first quarter as investors worried about the triple whammy of headwinds they’ll face as the coronavirus outbreak continues: slowing economic activity, loan exposure to sectors severely hampered by the crisis, and the Federal Reserve’s move to slash interest rates to maintain the flow of credit. Many banks are now trading below book value.
“In absolute terms we think Citi is the stunner at just 0.6x TBV, although BAC, GS and MS are also all well below book, Kotowski wrote. “Thus, the market is building-in large losses that we just don’t think will be coming.”
That’s not to say there won’t be any losses, as Kotowski expects a wave of net charge-offs to peak in the first quarter of 2021 with earnings expected to return to some level of normal late next year. Of the banks in his coverage universe, Kotowski likes U.S. Bancorp, noting its “outstanding long-term asset quality track record” and the fact that its stock “significantly oversold.”
Oppenheimer isn’t the only shop trying to pick winners on the other side of the coronavirus pandemic. Keefe, Bruyette & Woods recently upgraded Bank of New York Mellon (BK)—it will see fewer loan losses than peers—and JPMorgan Chase (JPM)—it’s one of the few big banks trading above book value and could continue to grow through the crisis—to Outperform.
“We do believe that investors can justify owning JPM at the current valuation given it is a high-quality franchise where returns over the cycle should be stronger than peers,” Brian Kleinhanzl, an analyst at KBW, wrote Tuesday. “In addition, we view JPM as a firm that can use the company’s balance sheet to gain market share and come out of the recession stronger.”
Still, Kleinhanzl lowered its ratings on two banks in its coverage universe to Market Perform. Citigroup’s retail cards segment could be harmed and the bank is more exposed to disruptions to the global supply chain due to the coronavirus. State Street (STT), may be hurt by low rates and lower equity market returns.
Of course, these are just best guesses. We’ll find out more when they start reporting mid-April.
Write to Carleton English at firstname.lastname@example.org