Displaying items by tag: banks
The better the economy gets, the more banks seem like a good buy. Banks have been rather severely beaten up over the last several months, largely missing on the price recovery of so many other stocks. This is primarily because of two factors—ultra-low interest rates, and the potential for losses on their loan portfolios. However, it is increasingly appearing like loan losses may not be nearly so severe as forecast, and that billions of Dollars set aside to account for such losses may now be released onto earnings over the next couple of quarters.
FINSUM: Two considerations here. Firstly, the idea of loan losses flowing back to the bottom line and causing upside surprises at earnings time sounds great, especially within the longer-term perspective that banks are a good macro bet on the recovery. The downside risk here relates to an article yesterday in BuzzFeed that accused banks (using obtained data on potential fraudulent activity in client accounts) of not following regulations related to money laundering. That could obviously turn into a big mess, but as yet it is unclear if that is a material risk.
Banks have been absolutely hammered since COVID erupted, and they have not come back very much at all. Overall they are down 33% on the year versus a 5% gain for the S&P 500. Worries about loan losses and low interest rates headline the set of fears for the banking sector. However, banks may have an ace in the hole. Early in the year they set aside tens of billions for loan losses—which hurt earnings, but that may now be their good fortune. Loan losses have not been as bad as expected and many suspect that banks may start to let some of those loss provisions flow through to the bottom line in the next couple earnings seasons.
FINSUM: In our view, this would be a double whammy to the upside for the sector. Not only would it result in blowout earnings, but it would officially alleviate a big fear—that loan losses are going to be very bad because of COVID. Altogether seems like a good opportunity.
Bank stocks have been heavy maligned by investors since COVID erupted. Several bank indexes, like the KBW, are down significantly on the year. KBE, a popular bank ETF is down over 30% on the year versus a small gain for the S&P 500. Ultra-low interest rates and loan losses are the big factors weighing on banks, but within the latter could be the spark of a rally. Banks have been setting aside tens of billions of Dollars in loan loss reserves, and seem to have been very bearish in their allocation of said reserves. Such reserves are also understood to likely have peaked at the end of Q2. That means that if loan losses aren’t as bad as forecast, some of those billions will likely be allowed to flow into the profit category for banks, allowing great earnings reports which could prompt a rally.
FINSUM: Banks are play on the recovery and can be had very cheaply. Additionally, this loan loss reserve aspect creates a nice catalyst for why a rally would start.
Picking stocks is about the hardest thing one can do right now. The market has risen so much—and seems to be defying gravity—that it is hard to know where to allocate money. On the one hand, growth stocks look ludicrously priced, while on the other, value has been underperforming for over a decade. With that said, here are some stocks that are still providing a good discount but look likely to rise as the performance of their underlying business improves. The first place to look is at beaten-up financial stocks, such as those in the KBW bank index, which is down 30% for the year despite big gains in the market. However, sentiment is turning positive. According to RBC, “Based upon the valuations and the outlook for the economy in 2021, we believe bank stocks can be purchased with the expectation the group outperforms the general market over the next 12-18 months”. The stocks to look for are Bank of America, Truist, TCF Financial, Western Alliance, BankUnited, and Investors Bancorp.
FINSUM: Banks are always a bet on the economy, and given their heavily maligned share prices and the general trajectory of the recovery, seem a wise bet. The only lingering risk in our minds (other than a weak recovery) is how continued ultra-low rates might hurt their earnings over the long haul.
It is a great time to be an investment bank. That fact became very clear last week when Goldman Sachs and Morgan Stanley earnings destroyed those of more traditional lenders like Bank of America, JP Morgan Chase, and Wells Fargo. Goldman, for instance, may be a great buy. It has much less main street lending exposure than regular banks, and has booming underwriting and trading businesses that are benefitting from low rates and market volatility. Some nice summary comments from an analyst at JMP Securities, saying “Goldman had a phenomenal quarter that allowed the firm to pad its legal reserves and conservatively position itself on loan losses … The bigger story is where the firm is going … Goldman is the biggest transformation story in finance, and the pandemic hasn’t derailed that”.
FINSUM: Firstly, these earnings came with all their employees working from home. So a 50% outperformance versus expectations with home-based traders. To us that is a sign of excellent management. More generally, their business mix—with a majority of institutional and growing, but not huge, consumer-facing revenue lines—seems ideal for the current environment. The stock is also priced below book value.