Bat­tered U.S. bank stocks may get a boost this year

The Globe and Mail (Ottawa/Quebec Edition) - - REPORT ON BUSINESS | GLOBE INVESTOR - SINÉAD CAREW

Bar­gain hunters who are bet­ting on stronger growth in 2019 are pre­pared to pounce

After a mis­er­able 2018, big U.S. bank stocks could be in for a lift if com­ing earn­ings re­leases show strong fourthquar­ter loan growth helps to off­set weak trad­ing rev­enue.

And some bar­gain hunters are also bet­ting on stronger 2019 growth than cur­rent val­u­a­tions im­ply.

The S&P 500 bank in­dex fell 18.4 per cent in 2018 com­pared with a 6.2-per-cent drop for the broader S&P 500 as in­vestors fled banks on con­cerns about slow­ing eco­nomic growth, weak­en­ing credit, a flat­ten­ing yield curve and bets the Fed­eral Re­serve would slow down in­ter­est rate hikes.

While some in­vestors are still wary of the sec­tor, which was at the epi­cen­tre of the pre­vi­ous eco­nomic down­turn, oth­ers say the sell-off went too far. Lisa Welch, lead port­fo­lio man­ager for the John Han­cock Re­gional Bank Fund in Bos­ton, was en­cour­aged by a pickup in loan growth data in the fourth quar­ter and also ex­pects banks to re­port im­prov­ing net in­ter­est mar­gins.

“With the val­u­a­tions they’re trad­ing at, we see banks as an ex­tremely at­trac­tive buy­ing op­por­tu­nity,” Ms. Welch said.

“Bank stocks were act­ing like the econ­omy in the U.S. was go­ing into a near term re­ces­sion. We dis­agreed.”

S&P 500 banks cur­rently trade about 9 times for­ward es­ti­mates, well below the long-term me­dian of 11.6 and the long-term av­er­age of 12.7, ac­cord­ing to data from Refini­tiv.

“Even with a lit­tle more cau­tious view on the econ­omy, that’s go­ing to slow from the growth we had in 2018, we still think there’s a lot of earn­ings growth po­ten­tial,” Ms. Welch said.

On Fri­day, the S&P bank sec­tor was up 0.2 per cent com­pared with a 0.2-per-cent de­cline for the bench­mark in­dex.

The fourth-quar­ter cor­po­rate re­port­ing sea­son will kick off with re­sults from Cit­i­group Inc. on Mon­day, Jan. 14, fol­lowed by JPMor­gan Chase & Co. and Wells Fargo & Co. the next day.

Wall Street ex­pects 25.5-per­cent fourth-quar­ter earn­ings growth for S&P 500 banks and 27.4 per cent for 2018, ac­cord­ing to IBES data from Refini­tiv which show bank earn­ings grow­ing at 10.7 per cent in 2019.

Ac­cord­ing to Jef­feries anal­y­sis of Fed­eral Re­serve data, U.S. bank loans grew 4.7 per cent year-over-year in the fourth quar­ter com­pared with 3.2 per cent a year ago, while com­mer­cial and in­dus­trial loans grew 9.2 per cent in the fourth quar­ter com­pared with 2.6 per cent in the year-ago quar­ter.

“We’ll have to see if that’s sus­tain­able but at least that’s a bet­ter story for the fourth quar­ter,” said Kush Goel, se­nior re­search an­a­lyst at Neu­berger Ber­man in New York. “Peo­ple have be­come too pes­simistic on the group. Loan growth and com­men­tary will be bet­ter than peo­ple fear.”

Many bank in­vestors have wor­ried that bank credit costs will rise as the cur­rent eco­nomic ex­pan­sion ages and as eco­nomic growth slows.

The sec­tor has also been crushed by uncer­tainty about how much fur­ther the Fed­eral Re­serve will raise in­ter­est rates and how its hik­ing path will af­fect net in­ter­est mar­gins and loan growth. While higher rates tend to boost bank mar­gins, they could also stunt loan de­mand as bor­row­ing gets more ex­pen­sive.

Aaron Dunn, co-di­rec­tor of value eq­uity for Ea­ton Vance in Bos­ton, es­ti­mated a less than 50per-cent chance of a “Goldilocks sit­u­a­tion” where Fed pol­icy is just right for banks.

While Mr. Dunn said bank stocks could rise in 2019, some val­u­a­tions do not look cheap when ris­ing credit costs are taken into ac­count.

“You’ve seen the peak in great credit and it’s prob­a­bly likely to get worse from here. I’m not say­ing its go­ing to fall apart, just in­cre­men­tally,” said Mr. Dunn, who favours Cit­i­group shares over JPMor­gan ow­ing to their val­u­a­tions.

Many bank in­vestors have wor­ried that bank credit costs will rise as the cur­rent eco­nomic ex­pan­sion ages and as eco­nomic growth slows.

MIKE SE­GAR/REUTERS

JPMor­gan Chase & Co. will re­lease the re­sults of its fourth-quar­ter cor­po­rate re­port­ing sea­son on Tues­day. Wall Street ex­pects 25.5-per-cent fourth-quar­ter earn­ings growth for S&P 500 banks.

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