The pullback of bank stocks on news that the Federal Reserve may halt rate hikes may present a perfect buying opportunity, according to some analysts. “The negative sentiment has created an opportunity with uniquely attractive valuations,” says Wells Fargo analyst Mike Mayo. Mayo says many banks are trading for an average of just 10 times projected 2019 earnings, with many yielding a dividend at 3% or higher. He sees bank profits rising between 8% and 10% this year, faster than the S&P 500, as the industry boosts revenues and keeps a tight lid on costs, per Barron’s.
Several of the big banks pulled back in the past week, including JPMorgan Chase & Co. (JPM), Citigroup Inc. (CITI), Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS).
The downdraft in bank stocks comes after a strong start to 2019, with the sector rising nearly 12% YTD. Banks, however, were whacked in 2018, losing about 20% on average, and the group remains about 16% below its highs last year.
Now, Mayo argues that at least 3 forces are driving these stocks upward, as outlined in the table below.
3 Reasons To Buy Bank Stocks Now
· Banks trade for an average of just 10 times projected 2019 earnings
· Many bank stocks yield 3% or more
· Bank profits forecast to rise 8% to 10% this year
Source: Wells Fargo; Barron's
Investors View Banking Sector as ‘Glass Half Empty’
Mayo sees these stocks as attractive buys despite concern among many investors that a slowdown in Fed rate hikes will hurt bank profits. While higher rates tend to fatten bank profit margins, Mayo argues that the impact is often overstated, per Barron’s. “Investors always seem to be viewing the glass as half empty,” says. Mayo. “The negative sentiment has created an opportunity with uniquely attractive valuations.”
Another positive force is big banks’ capital-return plan, which involves paying out 100% to shareholders for the 12 months ending in June in the form of stock buybacks and dividends. It's one of the most aggressive return strategies of any major industry group.
Mayo likes Bank of America Corp. (BAC) in particular, noting that the firm is benefiting from a 25-year effort to build out its national banking footprint, and that its technology investments should allow it to outpace its peers. Bank of America stock trades around 10 times 2019 earnings and yields 2.1%.
Bernstein analyst John McDonald echoes the bullish sentiment, viewing accelerated loan growth as a driver of the bank's earnings. He forecasts a 3% rise in net interest income in 2019 and 2020, driven by a 65%/35% mix of loan volumes and rates, versus a 35%/65% mix in 2018.
The banking sector’s solid performance this year has been a welcome change for many investors after seeing the sector lag the market for so long. However, the central question remains whether the Fed's reining in of interest rate hikes will hurt the sector's profits - and stock growth - longterm.