Banks Struggling to Keep Up
Despite the market rally, banks have been left behind. The SPDR S&P Bank ETF (KBE) has only gained 4% this year, and even with a recent rally, the regional bank ETF (KRE) remains down 8%. While earnings in the sector have held up, with a projected 16.8% growth in earnings per share for 2023, banks are trading at low multiples of only 9.3 times this year’s earnings and 9.7 times next year’s profits.
Potential for Banks to Thrive in 2023
Analysts at RBC Capital Market believe that banks could flourish next year if history repeats itself. They refer to the year 1995 when banks outperformed the broader S&P 500 by 20 percentage points, recording a staggering 54% increase. The parallel between now and then lies in the end of the Fed rate hike cycle and a soft landing for the economy.
However, the RBC analysts acknowledge that the final Basel III Endgame capital rules and recent protests by bank CEOs on Capitol Hill could pose challenges. They believe that the 2008-2009 financial crisis has resulted in a de-risking of the industry and that banks now have higher levels of loan-loss reserves due to the imposition of the Current Expected Credit Losses (CECL) accounting standard.
Despite these obstacles, RBC argues that banks are undervalued, even when considering potential losses in their bond portfolios. They recommend Bank of America (BAC), Fifth Third (FITB), Huntington Bancshares (HBAN), KeyCorp (KEY), M&T (MTB), PNC Financial Services Group (PNC), Truist Financial (TFC), Valley National (VLY), Western Alliance Bancorp (WAL), Webster Financial (WBS), and Wintrust Financial (WTFC) as potential investments.
On the other hand, Michael Marone, co-founder and co-chief investment officer at Crescent Rock Capital, has reservations. In an interview, he expressed caution about regional banks, stating that a hard landing would need to occur before getting involved. He also voiced concerns about inflation normalization at levels higher than before COVID even in the event of a recession.
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