NO SPRING THAW IN STORE FOR BANKS / THE WALL STREET JOURNAL

No Spring Thaw in Store for Banks

U.S. lenders haven’t been this cheap in decades, but they may stay cheap if interest-rate and growth trends work against them

By Aaron Back


Merger and acquisition activity has been weak for banks. JPMorgan Chase is among the lenders that have warned of declining trading revenue in the quarter. Photo: Richard B. Levine/Zuma Press



Investors have been down on U.S. bank stocks lately. First-quarter earnings from lenders are unlikely to cheer them up.

Their share prices have underperformed since the start of the year on rising economic pessimism, the inversion of the yield curve and concerns that the Federal Reserve may be done with its rate increases. The expectation that both short-term and long-term rates are headed higher had provided a tailwind to banks for years. Some investors even fear the Fed will be forced before long to start cutting rates, which would squeeze bank margins.

As a result, banks within the broad S&P 1500 index are now trading at just 11.2 times forward earnings, according to analysts at Keefe, Bruyette & Woods, compared with an average of 14.5 times over the past five years. Bank valuations are now at their widest discount to the benchmark S&P 500 index since the early 2000s, KBW notes.

First-quarter earnings season, which starts on Friday with reports from JPMorgan Chase , Wells Fargoand PNC Financial ,won’t be terrible. The Fed’s last rate increase was in December, so banks likely enjoyed some benefit from that during the quarter. Lending growth also has been surprisingly robust, with total commercial and industrial loans up by 10% from a year earlier at the end of March, according to Federal Reserve data.

For firms with big Wall Street arms, though, there will be more negatives. Despite some recent high-profile deals, initial public offering activity was weak for the quarter due to the government shutdown at the start of the year. Analysts at Credit Suisseestimate that equity underwriting revenues across Wall Street fell by 42% from a year earlier. Merger and acquisition activity also has been weak, and banks including JPMorgan and Citigroupalready have warned of declining trading revenue in the quarter.

All of these factors are already known to investors. Moreover, none will give any insight on what investors really want to know, which is the outlook for monetary policy and interest rates. If the economy improves to a point where Fed easing comes off the table, bank stocks could pop. Unless and until that happens, valuations can easily remain cheap.