Banks stocks offer a lot of value for long-term investors after their poor performance this year, according to one analyst.
“There is lack of short-term catalysts, but for patient investors this is a unique entry point,” says Mike Mayo, a banking analyst with Wells Fargo who has been bullish on the group.
Mayo points out that banks overall trade for just under book value. The SPDR S&P Bank exchange-traded fund (ticker: KBE) is down 41%, to $28.21 in 2020. The S&P 500 index is about flat so far this year.
Mayo calls the current downturn an “income statement recession and not a balance sheet recession,” meaning that banks can fund elevated loan-loss provisions from earnings and not impair their capital. “Book value is solid, and we think the third-quarter earnings reports will show book-value growth.”
Mayo favors JPMorgan Chase (JPM), Bank of America (BAC), PNC Financial Services Group (PNC), and U.S. Bancorp (USB). These are high-quality banks, but their share prices have been crunched this year. JPMorgan, at $92.74, is off 33% so far in 2020, and Bank of America, at $23.20, is down 34%. U.S. Bancorp is off 42%, at $34.50 and PNC has fallen 35%, to $102.48.
Dividend yields are now ample: JPMorgan yields 3.8%; Bank of America, 3%; PNC, 4.4%, and U.S. Bancorp, 4.7%.
JPMorgan and U.S. Bancorp, two companies with historically high returns, both trade for 1.2 times book value, while Bank of America is around 80% of book and PNC at 90% of book.
Bulls like Mayo focus on book value as an anchor for valuations given that 2020 earnings are depressed by credit provisions.
Battered Citigroup (C), which has fallen 47%, to $42, now trades for half of its book value. Goldman Sachs Group (GS), which is having a good year financially thanks to its strength in trading, is off 19%, to $186.18 and trades for about 85% of book value.
“There is a lack of short-term catalysts,” Mayo says. He points to numerous headwinds, including ultralow rates, credit issues, the election, additional regulatory oversight, uncertainty about the pandemic duration, and the current investor preference for growth over value. Near-zero short rates persist for years and dampen bank earnings.
Mayo says investors tell him: “We agree with you, but why buy now? In investors’ minds, it’s a dismal in the short term, but great if you have a two- to three-year time horizon.”
If Joe Biden wins the presidency, bank regulation could toughen, especially if the Senate flips and there is a Democratic majority. Speculation persists that bank critic Sen. Elizabeth Warren, the Massachusetts Democrat, could become Treasury secretary in a Biden administration. Some of that risk may already be priced into bank stocks, with Biden leading President Trump in the polls.
Good news on a Covid-19 vaccine in the coming months could lift the sector.
“Banks have some of the highest Covid beta in the market,” Mayo argues, referring to the sensitivity of bank stocks to pandemic developments. “It’s tough to call the exact time, but if you get a sector rotation into the banks, they could be up 10% to 20% in days.”
Write to Andrew Bary at andrew.bary@barrons.com
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September 24, 2020 at 05:00PM
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Big Bank Stocks Offer Value for Long-Term Investors, Analyst Says - Barron's
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