U.S. banks' post-election
rally may be just an appetizer
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[November 12, 2016]
In
recent years, bank stocks have been held back by heavy regulation and
historically low interest rates which have sapped the earnings potential
of their massive cash holdings.
But optimism about the sector's outlook is growing. Interest rates are
rising and investors are betting that Trump will follow through on his
campaign promise to review the increased number of regulations put on
the banking system after it nearly keeled over in the 2008 financial
crisis.
The S&P 500 bank subsector rose 10.2 percent in the three days following
Trump's victory in the U.S. presidential election. This was the index's
best three-day performance since August 2009.
In those three days, Wells Fargo Co shares rose 13.6 percent, JPMorgan
Chase & Co climbed 9.5 percent and Bank of America gained 11.9 percent.
Some investors and analysts watching banks say the stocks are likely not
near the end of their run.
"They are not close to being expensive yet," said Peter Kenny, senior
market strategist at Global Markets Advisory Group in New York.
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The S&P 500 banks are currently trading at about 11.2 times forward
earnings estimates as a group, up from about nine times in February,
when the index hit its lowest since May 2013.
Valuation is still well off peak levels of over 33 times earnings
estimates in May of 2009, though it trades near levels seen between 2002
and 2008, before many current regulations were put in place.
If rates continue to rise and the Trump administration gives some
clarity on how regulations will change, then bank valuations "certainly
can move higher," Piper Jaffray analyst Kevin Baker said.
Baker stopped short of giving a specific P/E estimate but he pointed to
the higher valuations of banks that are not designated as systemically
important financial institutions, commonly referred to as "too big to
fail".
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Traders work on the floor of the New York Stock Exchange (NYSE) in
New York City, U.S., November 10, 2016. REUTERS/Brendan McDermid
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Today, the minimum asset threshold for too-big-to-fail designated banks
is $50 billion. If this threshold is lifted to $250 billion in a
regulatory overhaul it would give a lot more flexibility that could
likely boost valuations of banks operating in that range, Baker said.
Valuations for too-big-to-fail designated banks are at around 12.5 times
forward earnings compared with multiples of 13 to 15 for banks outside
of this category, according to Baker.
Ed Keon, managing director and portfolio manager of QMA, a multi-asset
manager owned by Prudential Financial, said he has been buying into the
Financial Select Sector SPDR Fund, the ETF that tracks the S&P financial
sector, in the last couple of weeks.
He is betting on higher interest rates and a pick-up in economic growth.
The potential for lighter regulation added to his enthusiasm for the
sector.
"Of course, no one yet knows exactly what policy changes will occur and
exactly how much they will help profits, but I think the benefit might
be solid enough that I am maintaining my overweight holdings in the
sector,” Keon said.
(Reporting by Caroline Valetkevitch, Chuck Mikolajczak and Sinead Carew;
Writing by Sinead Carew; Editing by Daniel Bases and James Dalgleish)
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