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SunTrust lists several banks that had the “best relative credit loss history with the highest relative capital levels.”
Photograph by Eve Edelheit/Bloomberg
Bank investors are looking under the hood of their holdings as the triple threat of the coronavirus, low interest rates and low oil prices weighs on the sector’s shares.
As of Thursday’s trading, the KBW Nasdaq Bank Index (ticker: BKX) was down roughly 40% for the year. Wall Street analysts have been careful to caution that the rapidly declining stock market in the midst of the coronavirus doesn’t mean that this is a financial crisis. They note that the banking sector is stronger today than it was more than a decade ago, thanks to higher capital requirements and stress testing. Comforting to hear, perhaps, but investors are surely taking pause as banks continue to sell off, with many trading below their book value.
“It’s a super volatile environment right now and it’s tough to feel comfortable,” James Shanahan, senior equity analyst at Edward Jones, said in an interview, noting that he reduced earnings estimates by 5% to 7% in anticipation of banks recording higher credit costs in the first quarter.
Still, Wall Street is generally less worried about the long-term impact on the banks.
“This feels different than 2008,” Jon Curran, portfolio manager at Aberdeen Standard Investments said. “Capital cushions are thicker, liquidity profiles are better, and the banks have good funding profiles.”
“Banks have the scaffolding to withstand [this volatility],” he said. As it stands, he expects banks will feel one or two quarters of negative impact, while cautioning that this is a “fluid situation.”
With so many banks trading below book value, some investors are even looking for buying opportunities, especially with banks seemingly selling off in tandem, with few exceptions, to the names known to have wider-known exposure to energy and airlines.
“This is much more of an earnings issue than a credit issue,” Abbott Cooper, founder of Driver Management, said pointing to the banks being well-capitalized and that the majority of banks don’t have “meaningful exposure” to the energy, hospitality and airline industries. It is possible that some banks may pre-announce earnings to guide expectations.
“The key…is how long things stay in lockdown,” Cooper said. “However, if the current reaction (school and office closings, etc) persists for a month or longer, we could easily wind up in the severely adverse scenario.”
As interest rates tumble, banks are sure to see pressure on interest income as loans are likely to reprice faster than the bank’s funding sources, Cooper said. In the near term, the Fed’s decision last week to suddenly slash interest rates offered no help to the broader market, let alone the banks. It was “spectacularly ill-advised” and it “signals panic,” Cooper said of Fed’s move.
And while the sector as a whole may be stronger, some banks may fare better in this climate than others. Smaller, regional players with outsize exposure to the energy patch, for example, will be more under pressure than larger, more-diversified peers. This is why investors need to take a closer look at their banking holdings to check that each bank has a history of responsible risk-taking.
“Our view is that near-term earnings don’t matter and that banks should accept a short-term ‘profits holiday,’ ” Mike Mayo, analyst at Wells Fargo Securities said in a note Thursday. “From an economic standpoint, the biggest issue is if banks are “throwing good money after bad,” which means that underwriting standards become more important.”
Although there is confidence in the sector, the spotlight is turning to credit quality.
“We are biased towards owning banks with the most historically conservative and resilient credit cultures coupled with adequate capital levels to sustain unforeseen losses,” Jennifer Demba, analyst at SunTrust Robinson Humphrey, said in a note Wednesday. Demba went on to list several banks that had the “best relative credit loss history with the highest relative capital levels,” including some banks with exposure to the energy patch such as BOK Financial Corp. (ticker: BOKF) and Cullen/Frost Bankers (CFR). Other names that met Suntrust’s screening were First Financial Bankshares (FFIN), Bank OZK (OZK), and Hilltop Holdings (HTH).
Write to Carleton English at carleton.english@dowjones.com