Bank stocks have been surprisingly weak this year with the KBW Bank down as much as the S&P 500. I don’t think the punishment fits the crime and I think the big selloff creates an interesting buying opportunity.
It was great to see a prominent bank equity analyst echo what I’ve been saying for a while. Mike Mayo of Wells Fargo said this week, “US bank stocks are out of sync with otherwise strong fundamentals.” “If there is a recession, it is not affecting the banking industry, at least not yet,” he explained. He concluded, “We look at loans that are a month past due as the coal-mine canary of economic activity and potential loan losses. Based on these delinquencies, there are almost no areas that would warrant much concern.”
Certainly, I respect that there are many headwinds in the stock market, as investors are concerned about inflation, the pace of Fed rate hikes and the health of the economy. However, I think what myopic traders are missing out on is that the environment of higher prices leads to an expansion of the bank’s net interest income. Yes, the yield curve is inverted, but financing costs haven’t risen as fast as lending income, and that will likely translate into higher profits and a healthy dividend facilitation.
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Among the financial stocks worst hit this year Capital One Financial (COF), which is trading against 6 times its 2023 EPS target, having fallen more than 30% over the past year.
I acknowledge the bigger risks that naturally come with COF being mostly the card issuer. CEO Richard Fairbank said at a recent conference, “We should all be shocked if consumer credit doesn’t normalize from here and it already is. But surely the consumer is starting kind of before the starting line, if you will, in this race, and that’s something Good “.
However, I think the stock beating with people also worried about high marketing spend has been overstated. After all, the bank is increasingly going after what management considers “heavy spenders” clients, who it also says have demonstrated lower levels of credit loss with higher average payment rates.
I also get a 2.3% dividend yield with COF.
American bank BAC CEO Brian Moynihan has also been vocal throughout the year about the health of US consumers. The financial giant is known for its leading base of consumer deposits, and should benefit from the negative impact on deposit rates relative to income from its loans. In fact, the interest rate paid on BBK savings accounts was less than 10 basis points as of last week.
Of course, higher rates are available for preferred clients even though these often have multiple lines of business and carry much higher balances with the bank on average.
Fee income from mortgages and investment banking took a big hit in 2022, but trading revenue should benefit from market volatility in the third quarter. BAC shares trade for 11 times estimated earnings and offer a 2.5% dividend.
Regional banking power PNC Financial (PNC) recently said that corporate credit utilization was higher in the first half of 2022, resulting in an increase in loan balances. The company's chief financial officer, Robert Q. Reilly, added, "I would say in the last 90 days, the growth has been driven more by installations rather than increases in usage, which is broad."
PNC also ditched its familiar playbook with its purchase of BBVA USA branches last year, remarkably similar to the bank's successful purchase of RBC's Southeast branch network in 2011.
This acquisition, consolidated over a four-month period, expands the PNC's access to 29 of the 30 best urban statistical areas across the country. Management said in June that momentum for sales of new products (particularly within commercial products) was on a strong track.
PNC generates nearly 60% of income from spreads, while strong credit performance, very low cost deposit financing and a strong capital base are key positive factors.
A 28% pullback from the January high leaves shares attractively priced at 10 times estimated earnings and the dividend yield is 3.6%.
Yes, credit costs are likely to return to a higher normal, but in addition to sports healthy income data, I think the banking industry is still well capitalized, with each of the 33 banks passing the last Fed stress test in June.