News

Undervalued Banks: A Promising Opportunity

James L. Flint

• August 19, 2023

Introduction

The Persistence of Underperformance

According to Oppenheimer's analysis, the KBW Nasdaq Bank Index fell approximately 30% relative to the market soon after the Silicon Valley Bank collapse. However, despite some recovery, the underperformance has not yet been fully recouped, leaving these bank stocks significantly undervalued. This presents an attractive opportunity for investors seeking potential bargains in the banking sector.

A Positive View on Bank Rates

Although the Federal Reserve's handling of quantitative tightening has led to faster and higher rate hikes than ideal for banks, Oppenheimer believes that these hikes still have a net positive effect on the industry. While the initial impact may cause some challenges, the long-term benefits are expected to outweigh the drawbacks. Therefore, despite the present challenges posed by rate fluctuations, Oppenheimer remains optimistic about the banks' ability to leverage these rate changes for their benefit.

An Industry of Varying Outcomes

Oppenheimer points out an extraordinary dispersion of outcomes in the industry when it comes to net interest income. This uneven distribution signifies that banks have experienced varying levels of success in generating income from the interest earned on loans and other financial activities. By carefully identifying banks with favorable net interest income performance, investors can potentially capitalize on this discrepancy and benefit from the industry's heterogeneous landscape.

In conclusion, Oppenheimer recommends Bank of America Corp., JPMorgan Chase & Co., Citigroup, Morgan Stanley, Goldman Sachs Group Inc., and U.S. Bancorp as undervalued stocks in the market. While the KBW Nasdaq Bank Index has yet to fully recover from its post-collapse drop, analysts believe that these banks are poised for potential growth. Despite challenges surrounding rate fluctuations and income disparities within the industry, investors may find promising opportunities in these undervalued banks.