Here's what to expect when banks report earnings, and how cheap their stocks are now
By Philip van Doorn
Many regional banks are expected to show big declines in profits. But there may be bargains for contrarian investors who can commit for the long term.
You might have expected financial stocks to be among the worst performers in the S&P 500 this year, in light of three high-profile bank failures, the pressure from the decline in market values for banks' bond holdings and the competition for deposits as interest rates have risen. But the financial sector is down 2.8% this year with dividends reinvested. Maybe this is because bank stocks are inexpensive enough to attract long-term investors.
JPMorgan Chase & Co. (JPM) will kick off the banking industry's third-quarter earnings season on Oct. 13 before the market open, with Citigroup Inc. (C) and Wells Fargo & Co. (WFC) also reporting that day. Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS) will report on Oct. 17, and Morgan Stanley (MS) will round out the "big six" U.S. banks with its third-quarter earnings announcement on Oct. 18.
Below are tables showing what analysts expect for the largest 20 U.S. banks by total assets. But first let's look at stock performance and valuations.
Big bank stocks are cheap
Here are weighted forward price-to-earnings valuations for the 11 sectors of the S&P 500 SPX sectors and broad stock indexes with a comparison of current valuations to 5- and 10-year averages:
Index Forward P/E 5-year average P/E 10-year average P/E Current P/E to 5-year average Current P/E to 10-year average
Energy 11.08 11.15 18.80 99% 59%
Financials 12.69 14.65 14.08 87% 90%
Utilities 14.42 18.29 17.39 79% 83%
Real Estate 14.80 19.86 18.88 75% 78%
Communication Services 16.58 19.09 19.00 87% 87%
Health Care 16.84 16.46 16.34 102% 103%
Materials 16.87 16.99 16.42 99% 103%
Industrials 17.28 19.84 18.16 87% 95%
Consumer Staples 18.56 19.97 19.34 93% 96%
Consumer Discretionary 24.00 30.41 25.40 79% 94%
Information Technology 24.37 22.24 18.61 110% 131%
S&P 500 17.83 19.03 17.78 94% 100%
DJ Industrial Average 16.02 17.49 16.54 92% 97%
Nasdaq Composite Index 24.59 26.71 24.18 92% 102%
Nasdaq-100 Index 24.46 25.24 22.15 97% 110%
Source: FactSet
The financial sector has the second lowest P/E of the 11 sectors and is trading at 71% the valuation for the full S&P 500. But that type of discount for the sector is typical. Now let's look at the largest 20 U.S. banks by June 30 total assets and see how their current forward P/E ratios stack up to their longer-term averages:
Bank Ticker Cit Total assets Forward P/E Forward P/E -- end of 2022 Forward P/E -- end of 2021 Current P/E to 5-year average Current P/E to 10-year average
JPMorgan Chase & Co. JPM New York $3,868 9.5 10.4 13.1 82% 84%
Bank of America Corp. BAC Charlotte, N.C. $3,123 8.0 9.0 13.9 72% 70%
Citigroup Inc. C New York $2,424 6.8 7.0 7.6 82% 74%
Wells Fargo & Co. WFC San Francisco $1,876 8.2 8.0 12.8 72% 70%
Goldman Sachs Group Inc. GS New York $1,571 9.4 9.2 9.4 102% 94%
Morgan Stanley MS New York $1,165 11.7 11.6 13.0 107% 104%
U.S. Bancorp USB Minneapolis $681 7.7 8.6 12.8 67% 63%
PNC Financial Services Group Inc. PNC Pittsburgh $558 9.7 9.8 14.2 78% 77%
Truist Financial Corporation TFC Charlotte, N.C. $555 7.8 8.2 12.7 68% 64%
Charles Schwab Corp. SCHW Westlake, Texas $512 13.2 17.1 22.9 74% 64%
Capital One Financial Corp. COF McLean, Va. $468 7.0 5.8 7.5 77% 74%
State Street Corp. STT Boston $295 8.6 9.5 10.9 86% 74%
American Express Co. AXP New York $245 12.2 13.7 16.9 78% 83%
Citizens Financial Group Inc. CFG Providence, R.I. $223 7.0 7.7 11.7 73% 62%
First Citizens BancShares Inc. Class A FCNCA Raleigh, N.C. $210 7.5 8.0 10.9 75% 75%
M&T Bank Corp. MTB Buffalo, N.Y. $208 8.2 7.7 13.3 74% 63%
Fifth Third Bancorp FITB Cincinnati $207 7.7 8.2 12.9 75% 69%
Ally Financial Inc. ALLY Detroit $197 6.3 5.8 6.6 85% 76%
KeyCorp KEY Cleveland $195 8.0 7.5 11.3 84% 74%
Huntington Bancshares Inc. HBAN Columbus, Ohio $189 7.8 9.0 11.2 74% 68%
Source: FactSet
Click on the tickers for more about each company or index.
Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.
The largest 20 banks are all trading at forward P/E valuations that are considerably lower than their 5- and 10-year averages, except for Goldman Sachs and Morgan Stanley.
One factor that may have helped push P/E valuations lower has been the curtailment of share buybacks, as banks build up capital to comply with new regulations. Buybacks lower share counts and increase earnings per share, hopefully to support rising share prices. But buybacks don't always pay off.
The rise in interest rates, which has pressured some banks because of the decline in value of their securities portfolios and increasing funding costs, will end eventually. Your decision on whether or not to invest in bank stocks may hinge upon your expectations for when the Federal Reserve will stop raising rates to combat inflation, or when an economic slowdown might cause the central bank to lower the federal-funds rate, currently in a target range of 5.25% to 5.50%.
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10-13-23 0522ET
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