Bank stocks have gotten hit as concerns about the U.S. economy have grown. They’re starting to look like bargains, and none more so than
SPDR S&P Bank
exchange-traded fund (ticker: KBE) has dropped 20.4% this year, only slightly less than the
22.9% decline. The trading and capital-markets activity that helped some of the biggest banks notch record profits during the pandemic is drying up, while investors fret the banks will have to start building up depleted reserves.
Even the factors that should have helped banks have yet to work in their favor. After years of low interest rates that squeezed profits, higher rates were supposed to provide a boost to earnings. Instead, the bank ETF dropped 3.8% on Thursday, the day after the Fed raised rates by three-quarters of a percentage point. It turns out that investors are less excited about the prospect of growing net interest income when it’s expected the Fed will trigger a recession.
It’s a challenging economic backdrop for banks—but they should be able to handle it. This isn’t 2008, when financials were at the center of a global meltdown. Even if the economy is recession-bound, banks are better equipped to handle economic shocks than they were more than a decade ago.
Don’t take our word for it. This week, the Fed will release the results of its annual stress test, to gauge if the largest banks can absorb losses and still lend to households and businesses during a severe economic downturn. Analysts at Barclays expect them to pass the test easily, noting the median bank it covers has capital levels 2.3 percentage points above the requirement set after last year’s test. Oh, and the banks should be able to raise their dividends after the test, with the median bank projected to offer a 4% yield.
To top it all off, banks are cheap—some of them, dirt cheap.
(JPM) trades at 1.3 times its book value while
Bank of America
(BAC) trades at 1.1 times.
Goldman Sachs Group
(GS) trades at book value, which has historically been a good level at which to buy the stock.
And then there’s Citigroup (C). The stock has fallen 23% in 2022, to $46.54, and at 0.5 times book value, it’s the cheapest of the big banks—and the one with the most to fix. At a time when bank stocks can be expected to move up and down in tandem based on the latest economic reports, fixing Citi’s problems could spur outperformance.
It’s not that everything is rosy. In March, Citigroup unveiled a multiphase strategy to streamline its operations and warned that costs would increase by 5% to 6% in 2022. It also said it would be reducing the number of shares it expected to buy back. That bad news now seems baked into the stock.
The good news isn’t. Citigroup has also made progress with divestitures—early bids valued its Banamex unit between $4 billion and $8 billion, according to reports—and the money could be used to increase buybacks. Even
Warren Buffett’s Berkshire Hathaway
(BRK.B) has been buying Citi stock, a vote of confidence if there ever was one.
Citi still has a lot of work to do, but at these prices, even a little good news could send the stock higher.
Write to Carleton English at email@example.com