New York: US bank stocks were on a tear this week after a deluge of better-than-feared earnings reports lured investors back to the downtrodden shares.
Led by lenders such as Zions Bancorp and KeyCorp, the KBW Bank Index gained about 7 per cent this week for its strongest advance since May last year. That outpaced a roughly 0.7 per cent gain in the S&P 500 Index.
Broadly speaking, earnings results for the second quarter reflected the bite of higher deposit costs, but the more important message for investors was that the announcements helped drive home that the companies have stabilized following the tumult in March.
Plenty of questions remain, with regulatory shifts and potential commercial real estate credit issues looming. Still, the profit updates helped the beaten-down sector pare its drop this year to 13 per cent, from as much as 29 per cent in May.
Big bank stocks are now giving the S&P 500’s rally a run for its money. The largest lenders had been outperforming smaller peers since March, while trailing the broader market’s advance. This week has helped the Wall Street behemoths narrow that year-to-date performance gap.
Morgan Stanley executives pointed to a “more promising tone and activity seen later in the quarter” across many parts of their businesses. Goldman Sachs Group profit dropped, but the stock gained as its results beat expectations that had been lowered heading into the report. Bank of America’s earnings rose as its fixed-income and equity trading topped estimates.
Flipping the tape
The S&P 500’s leaderboard this week has been chock full of bank stocks, especially some of the most beaten-down names. Zions Bancorp led the pack after its Wednesday earnings report showed deposits rising.
“The prospects of a soft landing coupled with the notion that banks may rebuild capital a little bit more quickly than what we anticipated - those two things combined created a little bit of a risk-on environment, which kind of helps some of the cheaper valuation names,” Konrad said.
Beyond S&P 500 names, Western Alliance Bancorp has rallied 24 per cent this week, as its results also showed climbing deposits.
Crisis discount
Bank stocks have been cheap for months, but the rally of recent weeks and diminished earnings expectations have boosted their price-to-earnings ratio. That valuation level for the KBW Bank Index, based on data compiled by Bloomberg for blended-forward estimates, has nearly recovered to where it was before the collapse of Silicon Valley Bank in March.
Without a crisis at hand, the “bank crisis discount” creates an opportunity, Wells Fargo & Co.’s Mike Mayo said this week in a Bloomberg TV interview. The sector has been trading at some of the cheapest valuations he’s seen during his career, outside a crisis or recession situation, he said.
Relative strength
Of course, some investors may be wary of jumping in at these levels, given all the questions around the industry’s outlook.
There’s also the concern that the big rally has pushed the KBW index into so-called overbought territory. The 14-day relative strength index for the benchmark rose above 70 earlier this week, a level last seen earlier this year in the weeks before bank shares plummeted in March.
