Bank investors can’t be blamed for feeling frustrated.
While the broader market has recovered from its March lows—with several stocks notching fresh highs—bank stocks have only slightly trimmed their losses. Even more perplexing, banks and financial stocks are bucking the historical trend of being market leaders following a downturn.
Following...
Capital levels at banks are 40% higher today than they were before 2008.
Dreamstime
Bank investors can’t be blamed for feeling frustrated.
While the broader market has recovered from its March lows—with several stocks notching fresh highs—bank stocks have only slightly trimmed their losses. Even more perplexing, banks and financial stocks are bucking the historical trend of being market leaders following a downturn.
Following the burst of the dot-com bubble in October 2002, financial stocks gained 38% over the next year, beating the S&P 500 by 4 percentage points. Then, after the March 2009 trough during the financial crisis, financials rallied a stunning 150% over the next 12 months, eclipsing the 69% gain in the S&P 500 over the same period, according to data from DataTrek.
This time is different. While the S&P 500 has recovered from its March trough and is up 2.9% this year, bank stocks, as measured by the SPDR S&P Bank ETF (ticker: KBE), are down 34%.
With plans to reopen the economy stalled or, in some cases, even reversed, bank investors are understandably feeling a little cautious about the sector. What that means is bank stocks are likely going to continue trading in a tight range until coronavirus cases are under control and economic activity returns to more normal levels, analysts say.
“Our primary concern is the surge in Covid cases which has led to certain states halting reopening and could expand to other states, which could result in a deeper recession and thus higher credit costs,” Peter Winter, analyst at Wedbush Securities, said in a note on Wednesday. “The longer this goes on, the more difficult it will be for certain businesses to come back from the brink.”
Even with a murkier outlook, banks aren’t expected to retest their March lows, thanks to being better-capitalized than in the lead-up to the last financial crisis. Capital levels are 40% higher today than they were before 2008, Winter noted. Also, since the last crisis, banks have also improved their credit discipline, including limiting credit exposure to riskier industries.
Banks are also helped by various fiscal and monetary relief packages, which have helped customers pay their bills.
But while government involvement is propping up the banks on one side, it is constraining them on the other. As part of the Federal Reserve’s annual stress tests, banks were required to halt buybacks and cap dividends. Sector investors are now in a bind where they know they can’t expect stock appreciation amid uncertain times and they also can’t fully count on their usual capital payouts.
“It will take a lot of good economic news before the Federal Reserve allows [the banks] to increase dividends or buy back stock,” Nicholas Colas, co-founder of DataTrek, said in a note on Wednesday.
For now, investors have to be patient and hope for good news.
Write to Carleton English at carleton.english@dowjones.com