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Bank stocks may be set to keep underperforming the broader market as a fresh crop of analysts are adding to questions about whether shares have fallen far enough.
Wednesday 19, December 2018
(Bloomberg)--Atlantic Equities’s John Heagerty cut his recommendation on JPMorgan Chase & Co. to neutral, saying the bank now “offers the least upside” to price targets among the majors, preferring Bank of America Corp. “from a defensive perspective.”
He also lowered his price targets and earnings-per-share forecasts for Bank of America, Citigroup Inc. and Wells Fargo & Co., as he expects less loan growth and net interest margin expansion, along with higher net charge-offs. And Heagerty sees lower equities and capital markets results and weaker fixed-income, currencies and commodities revenues, too—which may be “slightly” offset by higher equities trading.
The broad KBW Bank Index and the narrower KBW Regional Bank index have both declined about 19 per cent so far this year versus a five per cent drop for the S&P 500 Index. Bellwether Bank of America has dropped 17 per cent year-to-date, investor favourite JPMorgan is down 7.9 per cent and penalty-box bank Wells Fargo has tumbled 23 per cent.
At Nomura, Bill Carcache wrote that he’s “bracing for negative revisions in 2019,” adding that while regional bank stocks are cheap, it’s “too early to get bullish” as there’s no clarity about slowing earnings per share. Stock buyers are likely to “remain scarce,” he said, as long as there’s a risk of lower estimates. Such headwinds include stale consensus outlooks that are assuming too many rate hikes; a flatter yield curve; slower mortgage lending; faster-than-expected C&I credit normalisation and slower auto loan originations.
“Okay (sigh)...” Evercore ISI’s Glenn Schorr wrote in a note on financial companies, adding that “tough” would be an understatement for markets this quarter, with the S&P 500 facing the ninth-worst sell-off in a fourth-quarter since the late 1920s. Among possible reasons, he cites trade tensions, Federal Reserve balance sheet unwinding, yield curve flattening, slowing global growth expectations, high-yield and leveraged loan weakness and “other confirmatory signs of late cycle.”
Even so, Atlantic’s Heagerty isn’t completely pessimistic. The banking environment may still be “better than is currently perceived,” as recent data points to a pickup in commercial and industrial lending after loan growth softened during 2018. He also flagged a rebound in new mortgages, as 10-year Treasury yields have fallen, along with high consumer confidence, record low unemployment and continued benign credit trends.
Buckingham’s James Mitchell also offers a somewhat happier outlook. He views Citigroup, Morgan Stanley and State Street as the most oversold stocks among large-caps. “Looking ahead,” Mitchell wrote, “with this stock correction matching prior recessionary moves, turning negative on the group now would be like ‘closing the stable door after the horse has bolted.”’
“While it may take time for the stocks to rebound given continued macro uncertainty, we are hard pressed to argue that the risk/reward doesn’t look favourable.”