News

Unloved Sectors Present Opportunities for Banks

4.8

Clarence L. Polk

• September 22, 2023

• Higher-for-longer interest rates and recession worries have made bank stocks unattractive this year. However, this negativity is already reflected in the stock prices.
• The SPDR S&P Regional Banking exchange-traded fund (KRE) is currently down 30% and is trading at a low P/E ratio of nine times 12-month forward earnings.
• Truist Financial (TFC) and Huntington Bancshares (HBAN), among other bank stocks, are currently selling at or below their book value, indicating that they are undervalued.
• Recent data from BofA Securities shows that there has been a notable increase in investments in financials, suggesting that some investors are recognizing the potential in this sector.
• Technical indicators, such as the TD Sequential, also point to a reversal of the downward trend in the Financial Select Sector SPDR ETF (XLF), indicating a possible upward movement in the coming months.
• The resilience of banks in the face of challenges should not be overlooked. Credit concerns are manageable, with consumer delinquencies still below pre-Covid levels.
• Banks have proactively adjusted their lending and reserves to align with potential economic downturns, demonstrating their preparedness.

While the banking sector is not without its challenges, it presents an opportunity for investors who can see past the current negativity. With banks trading at discounted prices and various indicators suggesting a positive shift, now may be the time to consider investing in this unloved sector.

The Future of Banks in an Uncertain Economy

Analyst David George from Baird suggests that the negative impact on earnings caused by a weaker consumer and higher unemployment may have already peaked. This news brings hope to investors who are concerned about the current state of the economy.

Higher interest rates are also a source of worry for investors, as banks currently hold $558.4 billion in unrealized losses in their bond portfolios. These higher rates will increase funding costs for banks, which will affect the spread they earn on interest-earning assets and pay on liabilities. However, while rates will remain high, they are not expected to increase as rapidly as they have over the past 18 months. This more moderate pace should provide some relief for banks.

Though not as beneficial as a rate cut, a pause in rate increases will help banks stabilize their funding costs, according to analysts at D.A. Davidson.

Despite the challenges, there are still attractive opportunities in the banking sector. Western Alliance Bancorp (WAL), for example, has seen a 23% decline in its stock price this year and currently trades at 5.8 times earnings, below its five-year average of nine times. This presents a potential buying opportunity, as the stock is expected to rebound. Analyst Matthew Clark from Piper Sandler predicts that the stock could reach $60, representing a 30% increase from its recent levels. Furthermore, the Regional Bank ETF offers investors a chance to profit from the sector's recovery while yielding 3.4%.

In conclusion, banks should not be overlooked by investors, as there are indications that the worst may be behind them. With careful consideration and strategic investments, there are opportunities for growth and stability in the banking industry.