Bank stocks have taken a beating in the past year, falling nearly 20% as measured by the the KBW Nasdaq Bank Index (BKX), nearly triple the decline of the broader S&P 500. But amid that bearish sentiment, several investors see an opportunity in big bank stocks like JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Bank of America Corp. (BAC), and Goldman Sachs Group Inc. (GS). These investors say banks already have strong fundamentals. And now, the recent sell-off means they have attractive valuations, per a detailed story in the Financial Times,
“The market is making a huge and unprecedented bet that is not supported by history,” says Patrick Kaser, who manages the $6.5 billion in Brandywine’s Classic Large Cap Value fund. Another investor, Christopher Davis, who manages $23 billion in assets at New York-based Davis Funds, says financial stocks have “enormous value because there is [much] lower risk than people imagine there to be."
What it Means for Investors
Kaser cities several metrics that he says show banks are still healthy, per the FT. For starters he says that banks' price-to-earnings multiples over the past six business cycles did not compress until a recession was just around the corner. By contrast, bank stock multiples have contracted in the past six months even though there is no data suggesting that a recession is near. Kaser and other bulls say bank stocks are likely to rise due to a combination of share repurchases, loan growth, rising dividends and cost cutting, which could boost earnings growth for big U.S. banks into the mid-teens.
Davis compares the current period to the years that immediately followed the 1980 savings and loans crisis, after which banks emerged healthier. Today, he argues that bank balance sheets are stronger following the 2007-2008 financial crisis and that the competitive environment is healthier, according to the FT. Today, the relative strength of banks' balance sheets means that they can redirect their earnings towards distributions to shareholders.
Despite that bullish view, many investors are concerned that bank profits will slow sharply once the positive impact of the Trump administration's tax cuts wear off after the fourth-quarter earnings season. The tax cut gave a big boost to 2018 earnings compared to 2017, when taxes were higher. While investors are generally aware of this, weaker earnings growth in 2019 may pressure bank stocks.