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Banking sector stocks are down roughly 30% this year.
Dreamstime
Most investors have a hard time finding one reason to invest in bank stocks, but analysts at Truist Securities had little difficulty coming up with 10 reasons to pile into the unloved sector.
Understandably, investors have been skittish about investing in banks. Low interest rates and an uncertain economic outlook make it difficult for them to make money. While banks today are much stronger than they were during the financial crisis of 2008-09, the memory of the last crisis also likely still looms large in investors’ minds. The sector is down roughly 30% this year, according to the
PHLXKBW Bank Index
(ticker: BKX), while the
S&P 500
has gained 5.4%.
While the larger, universal banks have generally won analyst favor because of their diverse revenue streams, there are also opportunities in regional and community banks, according to Jennifer Demba, analyst at Truist.
Broadly speaking, Demba expects third-quarter results for the big banks to be better than expected because profits aren’t expected to be weighed down by building up reserves for bad loans. The end of the election cycle—regardless of the outcome—should also help banks, as any administration will have to focus on the economic recovery. Finally, the eventual release of a Covid-19 vaccine and widely available treatments will also help bank stocks, she writes.
Amid her broadly bullish view, Demba particularly likes these stocks: Cadence Bancorp. (CADE),
Synovus Financial
(SNV),
Prosperity Bancshares
(PB),
Umpqua Holdings
(UMPQ),
Hilltop Holdings
(HTH), and Seacoast Banking Corp. of Florida (SBCF).
And Demba also outlined 10 reasons for investors to be bullish on banks in general:
1. Capital ratios are at a 20-year high and the 100 largest U.S. banks have an average common-equity tier 1 ratio of 11.3%, compared with 7.9% in 2007.
2. Loan-loss provisions are expected to decrease in the second half of the year as banks build up their reserves in the first half of the year, in accordance with a new accounting methodology.
3. Roughly 14% of loans in Demba’s coverage area have exposure to hard-hit industries such as airlines, restaurants, hotels, and energy—a figure she says is manageable.
4. Under the Cares Act, banks don’t have to classify troubled borrowers as troubled debt restructurings. The banks have been able to grant loan deferrals to customers and the number of loans under deferral agreements stands at roughly 2% to 5% now, compared with 10% to 25% in June.
5. While many have bemoaned the negative impact of low interest rates on banks’ performance, the sector was still able to make money in other low-rate eras.
6. Continued stay-at-home orders have people buying new homes, investing in their current homes, and buying boats and RVs, all of which support banks. Mortgage-banking fees alone account for 5% of revenue for the banks in Demba’s coverage universe.
7. As people leave densely populated urban areas, many are moving to the Sun Belt to also reap the benefit of lower taxes. This provides an opportunity for community banks in the region.
8. Banks have tons of opportunities to cut costs—especially when it comes to their branch footprint. During the pandemic, clients have grown increasingly comfortable using online banking. Demba estimates that annual operating costs could fall by 1%, which could improve earnings by 3% to 5%.
9. Before the pandemic, the banking sector was thought to be ripe for merger-and-acquisition activity. Recent uncertainty has stalled those plans but Demba—and others—expect a surge of merger activity when conditions stabilize.
10. Now may be a buying opportunity for patient investors. Bank valuations are at 20-year lows, trading at 10.1 times expected earnings for next year and 1.1 times tangible book value. Because the banks have likely already built up adequate reserves, the sector should rebound faster than in previous eras.
With stimulus hopes again looming in the background, investors appeared willing to embrace the sector in Wednesday afternoon trading. The KBW Bank Index gained 2%, while the S&P 500 was up 1.3%.
Write to Carleton English at [email protected]
