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The coronavirus crisis has been brutal for most investors, and bank stocks have taken it especially hard.
Here’s a comparison of total returns (including reinvested dividends) for the KBW Bank Index BKX, +2.65%, the KBW Regional Bank Index KRX, +3.77% and the S&P 500 SPX, +4.60% for 2020 through March 16:
FactSet Investors seem to have overreacted
The tremendous decline in bank stock prices “implies loan charge-offs between 7% to 10% [of total loans] on banks of all market-cap. sizes,” Christopher Marinac of Janney Montgomery Scott wrote in a note to clients on Monday.
But he also pointed out that from the first quarter of 2008 through the first quarter of 2011 (the financial crisis and its credit-loss aftermath), annualized gross charge-offs (loan losses, excluding any recoveries from repossessed property or other collateral) for banks with more than $1 billion in assets came to 1.9% of total loans, with gross charge-offs of 1.1% during a “normal recession” from the first quarter of 2000 to the fourth quarter of 2002.
In an interview on the same day, Marinac, the firm’s director of research, said there was a “fundamental disconnect” in the stock market, with investors assuming the banks as a group will lose money. Some of this year’s decline is tied to assumptions based on the 2008-2009 financial crisis, he said.
During that banking crisis, banks suffered tremendous losses as they charged-off commercial real-estate loans with relatively short terms that couldn’t be renewed because collateral properties had lost so much value. This time around, collateral is not the problem.
And whether regulators would make it easier for banks to renew or extend troubled commercial credits during the present crisis, Marinac said: “My answer is a resounding ‘yes.’ ”
“Banks were part of the problem in 2008 and 2009, and now banks are part of the solutions. You will see that happen in different ways. First, extending credit. Second, TDRs [troubled debt restructurings],” he added.
Capital strength and dividends
Eight of the largest U.S. banks announced suspensions of share buybacks March 19, including J.P. Morgan Chase JPM, +5.77%, Bank of America BAC, +4.60%, Citigroup C, -2.75%, Wells Fargo WFC, +8.26%, Goldman Sachs GS, +1.22%, Morgan Stanley MS, +5.31%, Bank of New York Mellon BK, +0.63% and State Street STT, +0.59%.
David Konrad of D.A. Davidson said this move wasn’t necessary to shore up capital, but was important so that banks could show they wanted “to be part of the solution of the crisis rather than blamed for it.”
Konrad is a managing director at D.A. Davidson and a senior research analyst. During an interview, he said the buyback suspensions would have “a low single-digit impact” on the banks’ earnings per share.
“I don’t think we are anywhere near dividend cuts yet, especially with the big banks,” in light of much higher levels of capital, he said. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 greatly increased required capital ratios for banks.
Marinac agrees that large banks’ dividends are “very secure.” He said that aside from “a one-time reserve” for expected loan losses from the coronavirus outbreak’s economic slowdown, “bank earnings will continue to be positive.”
“I still think they will make money off collecting interest. Banks are still accruing interest every hour of every day,” Marinac said.
Ian Lapey, portfolio manager of the Gabelli Global Financial Services Fund GFSIX, -10.49%, pointed to the Federal Reserves’s annual Comprehensive Capital Analysis and Review, known as CCAR, as evidence that the largest U.S. banks are well-prepared for the coronavirus crisis. Each year, the regulator tests the largest U.S. bank holding companies’ ability to withstand a “severely adverse” economic scenario.
“The June 2019 severely adverse scenario assumed 10% unemployment and a stock market decline of 50%. But even in that scenario, none of the banks tested would have to raise dilutive capital,” Lapey said during an interview. When a company issues new common shares to raise capital, the ownership position of its shareholders before the new issuance is diluted.
“I don’t see that happening under this scenario,” Lapey said, when asked if any of the big U.S. banks would have to issue new common shares, even though he “certainly” expects a global recession.
Lapey agrees with the other analysts that it was important for the big banks to suspend share buybacks. “It is better to invest in your business,” he said, adding that “at the end of the day, not buying back stock, for however long it is, will have a much smaller impact on shareholder returns than it would be if they mismanaged their balance sheets or missed out on [increased] lending opportunities.”
Lapey pointed to Citigroup, the largest holding of the Gabelli Global Financial Services Fund, as an example of how well-prepared the banks are: “If you compare their capital position now, to what it was going into the last financial crisis, it is remarkable. Assets to tangible book value in 2007 was 43 times and now it’s 13 times.”
He called Citi “incredibly attractive,” with shares selling well below tangible book value.
Charles Lemonides, founder of ValueWorks in New York, called Goldman Sachs another excellent value for long-term investors. “They don’t seem to be dangerously positioned in any area. Your upside is 50% to 100% over a two-year time frame,” he said.
The big 15
Here are price/tangible book value ratios, dividend yields and 2020 total returns for the 15 largest U.S. banks by total assets:
| Company | Ticker | Price/ tangible book value | Dividend yield | Total return – 2020 through March 16 |
| J.P. Morgan Chase & Co. | US:JPM | 1.47 | 4.07% | -36% |
| Bank of America Corp. | US:BAC | 1.06 | 3.52% | -42% |
| Citigroup Inc. | US:C | 0.59 | 4.95% | -48% |
| Wells Fargo & Co. | US:WFC | 0.79 | 7.70% | -50% |
| Goldman Sachs Group Inc. | US:GS | 0.72 | 3.23% | -32% |
| Morgan Stanley | US:MS | 0.79 | 4.42% | -38% |
| U.S. Bancorp | USB, +0.34% | 1.51 | 5.16% | -45% |
| Truist Financial Corp. | TFC, +2.63% | 1.08 | 6.58% | -51% |
| PNC Financial Services Group Inc. | PNC, +2.56% | 0.97 | 5.11% | -43% |
| Capital One Financial Corp. | COF, -3.91% | 0.59 | 2.89% | -46% |
| Bank of New York Mellon Corp. | US:BK | 1.51 | 4.25% | -42% |
| State Street Corp. | US:STT | 1.44 | 4.36% | -40% |
| Ally Financial Inc. | ALLY, +1.31% | 0.43 | 4.72% | -47% |
| Fifth Third Bancorp | FITB, +0.58% | 0.65 | 7.83% | -55% |
| Citizens Financial Group Inc. | CFG, -0.90% | 1.23 | 5.63% | -41% |
| Source: FactSet | ||||
”Banks trade on tangible book value and earnings. Three weeks ago we began to focus on tangible book value,” Marinac said, because of the decline in bank stock valuations.
Upgrades
Because of the share-price declines and low valuations, members of Konrad’s team at D.A. Davidson upgraded their ratings to “buy” for these five smaller regional banks March 16:
- Glacier Bancorp GBCI, +5.23% of Kalispell, Mont.
- HomesStreet Inc. HMST, +11.41% of Seattle.
- Independent Bank Corp. INDB, +3.45% of Rockland, Mass.
- Luther Burbank Corp. LBC, +5.50% of Santa Rosa, Calif.
- Renasant Corp. RNST, +13.48% of Tupelo, Mississippi.
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