New Bank Projections for Rate Cuts and Coronavirus
We expect an additional rate cut at the Fed's March meeting, and we are starting to see value emerge within traditional banking.
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With the Federal Reserve's announcement of a 50-basis-point rate cut and the continuing development of the coronavirus and its implications for the economy, we have updated the projections for our traditional banking coverage. We are now incorporating the 50-basis-point cut which occurred on March 3, as well as one additional 25-basis-point cut, which we expect to take place at the Fed’s March meeting. Even if a third cut takes place at a different meeting, and not the March meeting, it would not have a material impact on our fair value estimates. Incorporating these rate cuts has caused our original net interest income estimates to drop by roughly 4%, on average. It is worth noting that the dispersion of changes to our estimates is wide. Our most rate sensitive name, narrow-moat Comerica (CMA), is now projected to have a net interest income level 12% lower than originally expected, while some of our least sensitive names have seen their estimates change by only 1%. We have also incorporated changes to our fee income estimates, as well as to our credit cost estimates. This is to anticipate a potential weakening in the economy as the coronavirus develops. On average, our fair value estimates have dropped 3% for our coverage list, and our EPS estimates have dropped 11% for 2020 and 9% for 2021. Even with these changes, we are starting to see value emerge within our traditional banking coverage. We believe the key is to think about how these banks will perform "through the cycle" and not simply about what next quarter's EPS will be.
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Eric Compton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.