Sceptic investors predict that the troubles facing the U.S. banking industry will likely not go away for some time, yet bargain hunters are swarming around discounted shares of these institutions.
In 2023, the S&P 500 bank index had a decline of around 11%. The year started with Silicon Valley Bank and many other lenders failing, triggering the biggest financial crisis since 2008. In comparison, the S&P 500 as a whole is up almost 15%.
Based on relative pricing, bank stocks are at an all-time low when compared to the S&P 500, according to data from BofA Global Research. Some investors find their values appealing because of this decline; the sector is now trading at eight times forecast earnings, which is less than half the S&P 500’s valuation of 19.7.
As for whether the appealing values are really a value trap—a word used to characterise inexpensive stocks—Quincy Krosby, chief global strategist at LPL Financial, stated that as of right now, it’s impossible to tell for sure.
Whether the Federal Reserve is about to end a monetary tightening cycle that has resulted in the highest US interest rates in decades is one important issue affecting bank stocks.
Higher interest rates are made possible for lenders by elevated rates. However, they also weaken demand for mortgages and consumer loans while making short-term bonds and other yield-generating instruments more alluring than savings accounts.
Few investors think that more rate hikes are imminent. However, indications that the Fed would maintain current rates for the majority of next year have put pressure on bank stocks. The Financial Select Sector SPDR Fund had net inflows of $694.59 million in the week ending on Wednesday, its highest weekly performance in more than three months, suggesting that some contrarian investors may be entering the market.
In front of an interest rate peak, analysts at BofA Global Research advised investors to “selectively” increase their exposure to bank equities this month. According to them, the majority of the sector’s concerns are caused by increased rates. These risks include margin pressure brought on by growing deposit costs and issues with commercial real estate.
Well-known investor Bill Gross stated last week that he thought the industry had reached its bottom and that he was holding many regional bank stocks, which fueled significant increases in their stock prices.
Neville Javeri, a portfolio manager at Allspring Global Investments, stated, “We think there is a lot of hidden value in banks if you are selective.” In his managed portfolios, Javeri has a heavier weighting towards banks than the S&P 500.
Larger banks, in Javeri’s opinion, have drastically reduced expenses and are in a position to boost buybacks and dividends in order to weather a time of slower loan growth.
The stocks of Fifth Third Bancorp and Goldman Sachs are among those that analysts at BofA suggest.
High mortgage rates from the past have hindered lending. According to the Apollo Group, 61% of all mortgages that are currently in force have interest rates that are less than 4%, which discourages customers from refinancing or moving. The average 30-year fixed-rate mortgage contract rate fell to 7.61% in the week ending Nov. 3, a quarter of a percentage point lower than it had been in the previous month.
Analyst growth predictions for financials, which include insurance businesses as well as banks, have been lowered in the meanwhile as the Fed continues to sustain higher interest rates for an extended period of time. This may hinder the expansion of mortgage loans.
LSEG projects that the financial industry would report 6.2% profits growth in 2024, about half of earlier projections from April that indicated 11.4% earnings growth.