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Quarter-End Insights

Bargains Hard to Find in Financials

The sector is feeling the pressure from regulators and appears to be fairly valued overall.

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  • The financial services industry appears to be fairly valued. The overall industry trades at a price/fair value ratio of 1.01, which suggests bargains are limited. The cheapest sector is credit services, at a price/fair value ratio of 0.92, while the most overvalued sector is Asian banks, with a price/fair value ratio of 1.18.
  • CCAR results were a surprise, and U.S. regulators continue to confound banks. One bank,  Zions Bancorp (ZION), did not pass the stress tests, while four others ( Citigroup (C), and the U.S. units of  HSBC (HSBC),  RBS (RBS), and  Banco Santander (SAN)) passed but did not win regulatory approval to increase capital returns to shareholders. A $4 billion error found by  Bank of America (BAC) also led to regulators asking the bank to suspend a share buyback and a planned dividend increase.
  • European regulators consider whether to fine banks enough to raise capital. The U.S. Justice Department is reportedly seeking a $10 billion-plus fine from  BNP Paribas (BNP) to settle a criminal investigation into allegations that the bank illegally evaded U.S. sanctions, which raises the question of whether regulators are pushing for a high enough fine to force the bank to raise capital or change management.
  • U.K budget bill affects annuity insurers. The introduction of a new budget bill in the U.K. in March has proven to have a negative impact on annuity sales.

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Stephen Ellis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.