Bank stocks are super cheap — even with the risk of recession – MarketWatch

Written by Amanda

Bank stocks are super cheap — even with the risk of recession  MarketWatch

Big banks will kick off earnings season next week, with JPMorgan Chase first out of the gate before the stock market opens on July 14.

What’s striking now is just how cheap the banks have gotten as a group.

Of course there’s the risk of recession and other worries. But bank stocks have declined more than the broader market this year. Naturally, there are many moving parts in their earnings. Here are some big ones:

  • Rising interest rates can boost banks’ profits as interest income on loans goes up and the industry continues to pay very little for deposits.
  • Rising interest rates mean a decline in the market value of banks’ securities investments and loans. Mark-to-market adjustments lower banks’ profits.
  • The decline in securities valuations has reduced investment banks’ underwriting activity, which will lower profits.
  • Even though credit quality remains very strong, the largest four U.S. banks by total assets (JPMorgan Chase & Co. JPM, Bank of America Corp. BAC, Citigroup Inc. C, and Wells Fargo & Co. WFC ) are expected to report $3.2 billion in provisions for loan loss reserves for the second quarter. Those additions to reserves directly lower banks’ pretax profits. And they will magnify difficult comparisons to profits a year earlier, which were boosted when the four banks’ combined provisions for LLR were a negative $6.3 billion. (The industry was releasing reserves and boosting profits because loan feared loan losses during the coronavirus pandemic never materialized.)
Bank stock valuations are very low

Excluding dividends, the S&P 500 index SPX has plummeted 19.6% this year through July 5, while the S&P 500 banking industry group has skidded 24.6%, according to FactSet.

But what about price-to-earnings valuations? Bank stocks as a group nearly always trade at a lower P/E valuation than the S&P 500 does. Both the banks and the full index are trading well below their average P/E over the past five years. But on a relative basis, the banks are cheaper to their five-year average P/E, as this table shows using data from analysts polled by FactSet.

Sector/Index Current forward P/E 5-year average forward P/E Current valuation to 5-year average Current valuation to S&P 500 5-year average valuation to S&P 500
S&P 500 Banks 8.47 12.42 68% 48% 57%
S&P 500 17.63 21.92 80%    

The banks are also trading for less than half the full index’s P/E. That is remarkable, based on the same comparisons for 10, 15 and 20 years:

Sector/Index Current forward P/E 10-year average forward P/E Current valuation to 10-year average Current valuation to S&P 500 10-year average valuation to S&P 500
S&P 500 Banks 8.47 12.38 68% 48% 63%
S&P 500 17.63 19.50 90%    
Sector/Index Current forward P/E 15-year average forward P/E Current valuation to 15-year average Current valuation to S&P 500 15-year average valuation to S&P 500
S&P 500 Banks 8.47 13.16 64% 48% 74%
S&P 500 17.63 17.67 100%    
Sector/Index Current forward P/E 20-year average forward P/E Current valuation to 20-year average Current valuation to S&P 500 20-year average valuation to S&P 500
S&P 500 Banks 8.47 13.22 64% 48% 75%
S&P 500 17.63 17.71 100%    

One more item of note in the last table is that despite this year’s decline, the full S&P 500 is trading only slightly cheaper, on a P/E basis, than its 20-year average P/E. So while the S&P 500 appears to be in line with a typical P/E valuation, the banks appear to be trading at bargain prices.

Is it time to scoop up bank stocks?

If you believe we’re heading into a recession (or already in one, because economic indicators lag), your first inclination might be to steer clear of bank stocks entirely, to avoid their expected credit losses and stock declines. Then again, the industry’s decline and super-low P/E valuation may provide a cushion.

What economic scenario do you expect? If you believe the U.S. economy is heading over a cliff, it might be time for some very conservative moves in your investment portfolio. But what if the Federal Reserve’s efforts to quell inflation are already bearing fruit? Maybe we’re in for a smooth landing?

Odeon Capital Group analyst Dick Bove wrote in a client note on July 1 that the Federal Reserve’s moves to raise interest rates and slow the growth of the U.S. money supply made it clear the central bank was “moving forward to meet its promise to reduce inflation.” Separately he wrote that it was “very difficult, if not impossible,” to predict a bottom for bank stocks.

He suggested buying on weakness for two reasons:

  • “The deglobalization of the world economy will result in a major increase in business activities that require bank lending.”
  • “The valuations on bank stocks tend to reflect the potential of a recession not the possibility of a strong surge in economic activity coming out of that recession (should it occur).”

Those comments reflect a long-term view of the sector, which some investors might consider very long term. Bove expects a long period of increasing production activity in the U.S., which should benefit banks, including U.S. Bancorp USB of Minneapolis, which he rates a “buy.” USB was the eighth-largest U.S. bank as of March 31, with $587 billion in total assets.

And maybe the banks are just where you want to be, after their decline, during a prolonged period of high inflation. The energy, financial and healthcare sectors were the best performers during high inflation in the 1970s, noted Tony DeSpirito , BlackRock’s CIO of U.S. Fundamental Equities and co-manager of the firm’s Equity Dividend Fund MADVX, in his third-quarter equity outlook. He believes financial stocks may fare even better in the current environment because of the “stronger bank balance sheets after restructuring and rigorous stress testing” following the financial crisis of 2008-2009.

How analysts view the banks

The following two tables summarize analysts’ views of the largest 20 U.S. bank holding companies by total assets.

There are some particularly low valuations based on consensus earnings estimates for the next 12 months and tangible book value as of March 31:

Bank Ticker City Total assets ($bil) Forward P/E Price/ tangible book value
JPMorgan Chase & Co. JPM New York $3,955 9.2 1.6
Bank of America Corp. BAC Charlotte, N.C. $3,238 8.9 1.5
Citigroup Inc. C New York $2,394 6.8 0.6
Wells Fargo & Co. WFC San Francisco $1,940 8.9 1.1
Goldman Sachs Group Inc. GS New York $1,589 8.2 1.0
Morgan Stanley MS New York $1,222 10.4 1.9
Charles Schwab Corp. SCHW Austin, Texas $681 14.8 7.1
U.S. Bancorp. USB Minneapolis $587 10.2 2.1
Truist Financial Corp. TFC Charlotte, N.C. $544 9.7 2.3
PNC Financial Services Group Inc. PNC Pittsburgh $541 10.4 2.0
Bank of New York Mellon Corp. BK New York $474 8.9 2.4
Capital One Financial Corp. COF McLean, Va. $434 5.5 1.0
State Street Corp. STT Boston $322 8.1 1.6
SVB Financial Group SIVB Santa Clara, Calif. $220 10.4 2.1
Fifth Third Bancorp FITB Cincinnati $211 8.4 1.7
American Express Co. AXP New York $196 14.0 5.7
Citizens Financial Group Inc. CFG Providence, R.I. $192 7.9 1.2
First Republic Bank FRC San Francisco $187 16.8 2.2
KeyCorp KEY Cleveland $181 7.3 1.5
Huntington Bancshares Inc. HBAN Columbus, Ohio $177 8.2 1.4
Source: FactSet

Citigroup is the only bank on the list whose shares have been trading below their March 31 tangible book value, according to FactSet. (A bank’s tangible book value is its book value less intangible assets, such as goodwill and loan servicing rights.)

In a note on June 16, Bove wrote that Citi’s “cash-like position is greater than its common equity,” and that recession-fears were hanging heavily on the stock. He rates Citi a “buy,” and called the bank “a one-stop shop for corporations that operate globally,” because of its dominant position in foreign-exchange markets.

Citigroup’s stock closed at $46.61 on July 5. Bove’s price target for the stock is $51.35, implying 10% upside potential over the next 12 months.

Oppenheimer analyst Chris Kotowski rates Citi “outperform” with a price target of $81, implying upside potential of 74% for the stock, with the assumption that banks as a group will return to more typical P/E valuations, with Citi eventually hitting a 70% multiple relative to the S&P 500, according to the firm’s financial institutions/commercial and investment banking update on July 1.

Here’s a summary of analysts ratings and price targets for the group, again ranked by assets:

Bank Ticker Share “buy” ratings Share neutral ratings Share “sell” ratings Closing price – July 5 Consensus price target Implied 12-month upside potential
JPMorgan Chase & Co. JPM 54% 39% 7% $112.62 $150.42 34%
Bank of America Corp. BAC 62% 35% 3% $31.24 $45.20 45%
Citigroup Inc. C 48% 48% 4% $46.61 $60.10 29%
Wells Fargo & Co. WFC 76% 24% 0% $40.10 $55.97 40%
Goldman Sachs Group Inc. GS 64% 36% 0% $297.20 $404.60 36%
Morgan Stanley MS 72% 28% 0% $76.11 $98.32 29%
Charles Schwab Corp. SCHW 78% 22% 0% $63.39 $90.67 43%
U.S. Bancorp. USB 35% 61% 4% $46.46 $57.86 25%
Truist Financial Corp. TFC 50% 42% 8% $48.64 $59.47 22%
PNC Financial Services Group Inc. PNC 46% 50% 4% $161.09 $199.15 24%
Bank of New York Mellon Corp. BK 37% 63% 0% $42.08 $50.59 20%
Capital One Financial Corp. COF 67% 29% 4% $106.66 $161.90 52%
State Street Corp. STT 50% 50% 0% $63.07 $85.60 36%
SVB Financial Group SIVB 71% 29% 0% $412.41 $644.23 56%
Fifth Third Bancorp FITB 70% 30% 0% $33.70 $45.96 36%
American Express Co. AXP 55% 41% 4% $139.65 $189.55 36%
Citizens Financial Group Inc. CFG 76% 19% 5% $35.88 $49.42 38%
First Republic Bank FRC 54% 42% 4% $148.14 $185.18 25%
KeyCorp KEY 36% 50% 14% $17.38 $23.26 34%
Huntington Bancshares Inc. HBAN 45% 40% 15% $12.13 $15.85 31%
Source: FactSet

Many of these bank stocks have high dividend yields, which you can see if you click on the tickers.

You should be careful to do your own research to form your own opinion before making any investment.

Click here for Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.

More on bank earnings: Wall Street profit expectations for megabanks cooled slightly ahead of earnings despite deep freeze in stocks

Don’t miss: Here’s the best way to play the S&P Dividend Aristocrat stocks

Source: marketwatch.com

About the author


Hi there, I am Amanda and I work as an editor at impactinvesting.ai;  if you are interested in my services, please reach me at amanda.impactinvesting.ai

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