The Underappreciated State of Bank Stocks
Bank stocks have continuously been overlooked, despite their resilience in the face of economic challenges. Even with the industry being rocked by upheaval in March, the nation's largest banks have proven their durability quarter after quarter. In fact, they successfully passed the Federal Reserve's strict stress test in June, which further confirmed their strength. Regulators have been forced to acknowledge the sector's resilience, despite preparing for tougher capital rules.
This strength is also reflected in the banks' earnings, with nearly three-quarters of them surpassing earnings estimates. In particular, the six largest banks, including JPMorgan Chase and Wells Fargo, exceeded expectations on both the top and bottom lines. However, the stock market does not seem to appreciate these achievements.
The SPDR S&P Bank exchange-traded fund (KBE) has been trading within a relatively narrow range since mid-March. This period coincided with the collapse of Silicon Valley Bank and Signature Bank, which sent shockwaves through Wall Street. Although the panic has subsided, stock prices have yet to recover. Now, investors are concerned about the future of the economy and how it will impact U.S. banks, which experienced another dip in stock prices last week.
Hubert de Barochez, a markets economist at Capital Economics, stated: "We believe that economic growth in the U.S. will weaken, resulting in reduced credit, lower fee income, increased provisioning, and higher credit losses." All of these factors should be worrisome for banks. Nevertheless, for almost two years now, banks have been preparing for negative outcomes amidst rampant inflation and rapidly rising interest rates.
Despite the prevailing pessimism surrounding bank stocks, their resilience and strong earnings should not go unrecognized. As the economy faces uncertainties, it is crucial to acknowledge the continued strength of these financial institutions.
Banking ETF Offers Opportunity for Investors
The SPDR S&P Bank ETF presents a promising opportunity for investors. Currently, the ETF is trading at only seven times 12-month forward earnings and 0.9 times book value. These valuations are significantly low, not only by historical standards but also in comparison to other industries. Investing in this index can provide a 3.7% yield, albeit lower than the near 5% offered by the 10-year Treasury. However, the potential for stock appreciation makes it an attractive choice.
Banks are also making efforts to enhance their performance, which can further increase the upside for investors. Goldman Sachs Group (GS) has decided to refocus on its core strengths of investment banking and asset management, abandoning its previous venture into consumer banking. The stock is currently trading at approximately book value, historically a favorable entry point. Although the most recent quarter saw a 33% decline in profits due to a write-down on the sale of GreenSky and other investments, any recovery in deal making is likely to act as a catalyst for the stock.
Citigroup (C) presents an even cheaper option, trading at just 0.5 times tangible book. Although investors have faced disappointments with this stock in the past, CEO Jane Fraser's streamlining efforts are now showing promising results. Last month, Citigroup announced a reorganization into five interconnected businesses to eliminate unnecessary complexity within the bank. For those seeking further assurance, waiting until fourth-quarter earnings may provide a clearer understanding of the financial impact resulting from these changes.
However, it is important not to delay taking advantage of these opportunities for too long.
All Rights Reserved © 2024
Post a comment