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deep-dive:-bank-stocks-are-plunging-ae”-it-may-be-an-overreaction,-longtime-analyst-says
deep-dive:-bank-stocks-are-plunging-ae”-it-may-be-an-overreaction,-longtime-analyst-says

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Deep Dive: Bank stocks are plunging — it may be an overreaction, longtime analyst says

Deep Dive

Banks have increased profits during periods of low interest rates, says Odeon Capital Group’s Richard Bove

Shares of Comerica of Dallas were down 10% on Thursday.


Bloomberg

Bank shares skidded Thursday as investors turned bearish after the Federal Reserve said it would keep official interest rates near zero for years amid lasting economic pain. Investors may be overreacting, according to at least one longtime bank analyst.

The Fed predicted that the federal funds median target rate would be 0.10% through 2022. You can read the projections here and see related tables here.

On Thursday, the Dow Jones Industrial Average
US:DJIA
was down 786 points (or 2.9%) in the first minutes of trading, while the benchmark S&P 500 Index
US:SPX
fell 2.6% and the Nasdaq Composite Index
US:COMP
decreased 2.2%.

The Invesco KBW Bank ETF
US:KBWB,
which tracks the KBW Bank Index
US:BKX,
tumbled 4.8%.

The KBW Bank Index comprises 24 stocks of universal and large regional U.S. banks. Here’s how all 24 fared during the early minutes of trading Thursday, with Goldman Sachs
US:GS
and Morgan Stanley
US:MS
added to the list so that the “big six” U.S. banks are all included:

Bank

Ticker

Headquarters

Price change – June 11

Price change – 2020

Price change – 2019

CIT Group Inc.

US:CIT New York

-14.5%

-53.4%

19.2%

Comerica Inc.

US:CMA Dallas

-10.2%

-47.7%

4.5%

Citizens Financial Group Inc.

US:CFG Providence, R.I.

-9.4%

-39.2%

36.6%

KeyCorp

US:KEY Cleveland

-9.4%

-37.8%

36.9%

Wells Fargo & Co.

US:WFC San Francisco

-8.3%

-49.3%

16.8%

Regions Financial Corp.

US:RF Birmingham, Ala.

-8.2%

-32.3%

28.3%

Citigroup Inc.

US:C New York

-8.2%

-35.8%

53.5%

Fifth Third Bancorp

US:FITB Cincinnati

-8.1%

-33.0%

30.6%

Truist Financial Corp.

US:TFC Charlotte, N.C.

-8.0%

-32.2%

30.0%

Capital One Financial Corp.

US:COF McLean, Va.

-7.6%

-35.6%

36.1%

Huntington Bancshares Inc.

US:HBAN Columbus, Ohio

-7.4%

-36.1%

26.5%

M&T Bank Corp.

US:MTB Buffalo, N.Y.

-7.0%

-36.1%

18.6%

U.S. Bancorp

US:USB Minneapolis

-6.9%

-38.3%

29.7%

SVB Financial Group

US:SIVB Santa Clara, Calif.

-6.9%

-17.8%

32.2%

People’s United Financial Inc.

US:PBCT Bridgeport, Conn.

-6.9%

-29.5%

17.1%

Zions Bancorporation N.A.

US:ZION Salt Lake City

-6.8%

-34.0%

27.4%

Bank of America Corp

US:BAC Charlotte, N.C.

-6.6%

-29.5%

42.9%

J.P. Morgan Chase & Co.

US:JPM New York

-5.9%

-28.4%

42.8%

PNC Financial Services Group Inc.

US:PNC Pittsburgh

-5.8%

-29.8%

36.5%

Morgan Stanley

US:MS New York

-5.4%

-9.9%

28.9%

New York Community Bancorp Inc.

US:NYCB Westbury, N.Y.

-5.4%

-14.7%

27.7%

State Street Corp.

US:STT Boston

-5.2%

-20.7%

25.4%

Northern Trust Corp.

US:NTRS Chicago

-4.7%

-21.4%

27.1%

Goldman Sachs Group Inc.

US:GS New York

-4.6%

-11.4%

37.6%

Bank of New York Mellon Corp.

US:BK New York

-4.1%

-23.9%

6.9%

First Republic Bank

US:FRC San Francisco

-3.7%

-8.0%

35.2%

Source: FactSet

Scroll the table to see the data. Click on the tickers for more about each bank, including news and business profiles.

Varied sources of bank earnings

Odeon Capital Group analyst Richard Bove quoted a colleague as saying: “Apparently, it is true that the only factor that impacts bank stock prices is interest rates,” in a report early Thursday.

Bove refuted that assertion: “For example, the period of lowest interest rates, in modern times, over a sustained period, in the United States was from 2008 to 2015. In this seven-year period, bank earnings declined in 2009 and 2014. They increased in 2010, 2011, 2012, 2013, and 2015. They hit all-time records in 2013 and 2015 and were close to an all-time record in 2014.”

Bove went on to point out that banks have differing business models and predicted that the best industry performers during the expected period of very low interest rates would be those with “the ability to acquire resources and sell products,” and those that could maintain the best loan quality. (Purer-play commercial lenders were among the worst performers in the banking space early Thursday.)

He cited the tremendous increase in money supply, from the action of the Federal Reserve and other central banks, which has helped lead to increased trading revenue and debt underwriting for investment banks.

Bove has “buy” ratings on J.P Morgan Chase
US:JPM,
Bank of America
US:BAC,
Citigroup
US:C,
KeyCorp
US:KEY,
Goldman Sachs
US:GS
and Morgan Stanley
US:MS,
among the banks listed on the table above, with “sell” ratings for M&T Bank Corp.
US:MTB
and Capital One
US:COF.

Stress tests

However, a factor that may weigh on bank stocks over the next two weeks is the annual stress tests and regulatory review of large banks’ capital plans. The Federal Reserve will announce the results at 4:30 p.m. ET on June 25.

 KBW analyst Brian Kleinhanzl expects none of the 34 banks whose capital plans will be reviewed by the Fed to request permission to repurchase shares during the 12-month period ended June 30, 2021. He expects the total payout ratio (dividends on common shares plus stock buybacks divided by earnings) to be 56% over that period, declining from an estimated 139% for the previous 12-month period.

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