It’s hard to be a bank. It has been since the financial crisis. It was really hard in 2008-09; it was hard in 2011 when people thought Europe was coming undone; it’s hard now too. Year to date, the KBW Bank Index (blue line in above chart) is vastly underperforming the broad market (red line) – which itself isn’t looking too good.
Why are banks so shunned? It could be worry about the loan exposure banks have to oil producers -- though generally that’s no more than 1 -3% of all loans, and banks have been pretty clear about setting aside generous reserves.
It could be investors doubting that the Fed will push rates up as quickly as once expected – a negative for bank interest margins. Or It could be that political bank-bashing has been turned up a few notches.
But perhaps it‘s also partly fear overdone -- emotional unspecified anxiety about the state of the world, China, and energy and commodity prices.
Bank stocks are selling like a crisis is coming, but banks are in better shape than they have been in a long time. Prices have gotten so low that bank analyst Mike Mayo finally has turned bullish after having recommended a “sell” on banks for a long time. Barron’s recently quoted him saying, “Bank balance sheets are as strong as they’ve been in decades, and stock prices resemble recession troughs. Earnings are more stable than they have been in decades, and capital ratios are at the highest levels in 80 years.” Financial Times columnist Stephen Foley recently wrote, “One does not even have to be bullish on the economic outlook to be bullish on [bank] stocks; many banks could weather a mild recession and still increase their book value.”
Bank stocks are frustrating and require patience. But here’s something worth a thought: Citibank and Morgan Stanley trading below tangible book value and at single digit earnings multiples.