Financial stocks in 'the cheap seats' as top banks widely underperform the sector, says DataTrek

By Christine Idzelis

'Fundamentals alone do not adequately explain the current turmoil in U.S. bank stocks,' according to DataTrek

Financial stocks have landed in the "the cheap seats" alongside energy, with top banks looking even cheaper than the financial sector as a whole after stress emerged in the banking system in the past couple of weeks, according to DataTrek Research.

Large-cap financial stocks are the second cheapest sector in the S&P 500 index after energy, a DataTrek note emailed Tuesday shows. Energy has a forward price-to-earnings ratio of 9.1x while the financial sector is trading at 11.2x, it shows.

"Every other S&P 500 sector is still trading for at least 15x," Nicholas Colas, co-founder of DataTrek said in the note.

In the same note, DataTrek co-founder Jessica Rabe looked at the top 12 banks in the S&P 500's financial sector, saying most are "widely underperforming both the financials sector and S&P 500 this year."

The S&P 500's financial sector has dropped 8.9% in 2023 through Monday, with March's steep losses in the bank turmoil wiping out the year's gains, according to FactSet data.

"Almost all the banks on our list are cheaper" than both the financial sector and the S&P 500, she said of the top 12.

For example, JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. all have price-to-earnings ratios below the financial sector's 11.2x "based on Wall Street analysts' forward 12-month earnings estimates," Rabe highlighted in the note emailed Tuesday morning.

Banks                         Forward P/E 
Morgan Stanley MS             11.9x 
JPMorgan Chase & Co. JPM      9.8x 
Goldman Sachs Group Inc. GS   9.1x 
Bank of America Corp. BAC     8.1x 
Wells Fargo & Co. WFC         7.9x 
Citigroup Inc. C              7.7x 
Regions Financial Corp. RF    7.1x 
US Bancorp USB                7.0x 
Fifth Third Bancorp FITB      6.9x 
M&T Bank Corp. MTB            6.6x 
Truist Financial Corp. TFC    6.3x 
Citizens Financial Group CFG  6.3x 
Source: DataTrek note 

The average forward P/E for the top 12 banks listed by DataTrek is 7.9x, compared with 17.1x for the S&P 500 index, according to the note. The top 12 were also underperforming the S&P 500's financial sector this year, the note shows, citing an average loss of 13.6% even as Morgan Stanley stood out with a small gain.

The failure of U.S. regional banks earlier this month led to contagion fears and a selloff in stocks in the banking sector, with the Federal Reserve stepping in with an emergency backstop facility to help protect depositors.

Shares of the SPDR S&P Regional Banking ETF (KRE) tumbled almost 26% this year through Monday, while the SPDR S&P Bank ETF (KBE) was down around 20% over the same period. Both funds were trading sharply higher Tuesday afternoon, with gains of more than 5%, FactSet data show, at last check.

"Fundamentals alone do not adequately explain the current turmoil in U.S. bank stocks, which leaves us to conclude that the market is primarily concerned about systemic risk," Colas said in the note.

He cited the "risk of additional bank failures or forced mergers" and concerns around commercial real-estate lending. "Commercial real estate loans made by smaller banks are drawing increased attention as office occupancy rates remain at/below 50 percent and business activity in major U.S. urban centers has not recovered to pre-pandemic levels," Colas wrote.

"Lastly, interest rate uncertainty remains," he said. "None of these problems have easy, quick solutions."

Meanwhile, the top 12 banks will have to go through the Fed's 2023 stress test and comprehensive capital analysis and review process, which will determine "how much each bank can pay in annual dividends and the amount of allowable stock repurchases in the next year," according to Rabe.

DataTrek says the results will be out in June.

"Our own approach would be to look at the larger banks for a possible near-term bounce and wait for Stress Test/CCAR results before adding some of the 'smaller' banks on this list," said Rabe.

-Christine Idzelis

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03-21-23 1602ET

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