U.S. bank stocks are fine, if you are rich in patience
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[October 09, 2020] By
Sinéad Carew
(Reuters) - The U.S. bank sector has been
pummeled this year but investors hunting for bargains there may need
deep reserves of patience as banks are particularly sensitive to low
interest rates, the uneven economic recovery and the muddy stimulus
outlook.
The S&P 500 Bank subsector , which kicks off its third-quarter earnings
season on Oct. 13, was last down 33.7% for the year-to-date compared
with a 5.8% gain for the S&P 500 index.
Banks have been such a drag on the broader S&P financial index that its
19% year-to-date decline is second only to energy's 49.9% drop among the
S&P 11 major sectors.
To be sure, if lawmakers in Washington manage to reach an agreement, a
new fiscal stimulus package could help banks if it boosts U.S. loan
growth, interest rates and economic activity.
And the bank index is up 12% from its intraday trough on Sept. 2 to a
peak on Oct. 6 as yields for longer-dated U.S. treasuries have risen
with stimulus hopes as banks profit from higher interest rates.
But investors are unconvinced that recent gains will be sustainable as
the Federal Reserve has signaled plans to keep overnight rates low for
the foreseeable future in order to aid an economic recovery, which is
expected to take years.
“You’re looking at years for this sector to make a full recovery. It
will take a lot of positive things to happen in the U.S. economy for it
to get back to the type of performance we are seeing in the broader
S&P," said Rick Meckler, partner, Cherry Lane Investments, a family
investment office in New Vernon, New Jersey. "Investors, in my view,
will need to be patient."
Banks were outperforming the market on Thursday on renewed hopes for
stimulus pact after U.S. President Donald Trump said, without giving
details, that there was a good chance of a deal.
But as of Thursday afternoon there was no deal although U.S. House
Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin were set to
continue with talks.
Meckler says further stimulus would be "a good first step towards a
better environment for (banks) to generate top-line and bottom-line
growth."
But he does not see stimulus as a panacea to provide much change to low
interest rates, low borrowing and weak credit, which has plagued the
sector.
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A woman counts U.S. dollar bills at her home in Buenos Aires,
Argentina August 28, 2018. REUTERS/Marcos Brindicci/File Photo
Money manager Villere & Co has been drawn by low valuations in bank stocks such
as First Hawaiian Inc, down 44% year-to-date, and Kearny Financial Corp, off 41%
so far in 2020.
Lamar Villere, co-portfolio manager, says these banks are small enough that he
can more easily examine their risks than the exposures of more geographically
diverse and larger banks like JPMorgan Chase & Co or Wells Fargo & Co .
But even this cautious strategy is only suitable for those who can "wait it out
long term," said Villere who expects weaker results from the sector in the short
and intermediate term.
"What's baked in is some pretty terrible numbers," he said.
JPMorgan and Citigroup Inc will start the ball rolling on the third-quarter
earnings season on Oct. 13 followed by Wells Fargo and Goldman Sachs and Bank of
America Corp the next day.
On average the S&P 500 bank sector is expected to show a third-quarter earnings
decline of 31% and a revenue decline of 6.7%, according to estimates gathered by
Refinitiv.
The majority of big U.S. banks did manage to beat very low earnings per share
and revenue expectations for the second quarter, according to Refinitiv.
But for now, John Augustine, chief investment officer at Huntington National
Bank in Columbus, Ohio is staying away from the sector citing weak net interest
margins.
"Banks need to deliver this quarter," Augustine said.
(Graphic: Banks underperform broader market -
https://fingfx.thomsonreuters.com/
gfx/mkt/nmovawernva/
banksvssandp.PNG)
(Reporting by Sinéad Carew; Additional reporting by David Henry; Editing by Lisa
Shumaker and Alden Bentley)
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