Since the threat to the global economy due to the coronavirus outbreak suggests that central banks are ready to lower interest rates, it becomes clear that one of the sectors at risk is the fall-out bank.
A reduction in interest rates will reduce banks' income on products such as mortgages, personal credit lines and credit cards, while an economic slowdown or recession will cause corporate borrowers to lower spending or postpone their expansion plans.
That is the reason why 18% has fallen so far this year, compared to a decrease of 8.1% in the, because investors see lenders as the biggest losers when central banks worldwide lower interest rates to prevent recession .
KBW Bank Index Weekly price chart
Stocks attempted to revive yesterday following indications that central banks are trying to stabilize markets and protect economic growth against the impact of the corona virus after a week-long sell-out. The return on the US Treasury note benchmark fell new lows and fell from 1,317% to a low of 1,031% from the morning
.
Looking at bank valuations, it is not difficult to measure the mood of investors. The market values ??bank shares as if the economy is moving towards a clear recession. The KBW price-earnings ratio of around 9.5 is almost the lowest level compared to the S&P 500 since 2008.
Sour Mood
Goldman Sachs analyst Richard Ramsden wrote in a note that current bank ratings "ignore a 25% chance of a mild recession scenario". "Correcting recent equity movements, three interest rate cuts by the end of 2020, an assumption of no loan growth this year and the modeling of a 10% shock on capital market revenues results in a potential 20% reduction in profits in 2021, he said. ]
But the sour atmosphere surrounding bank shares does not mean that investors have to paint all names with the same brush. Shares of some of the largest lenders have become attractive after the massive sell-off last week. In this room we especially like Citigroup (NYSE 🙂 and JPMorgan Chase & Co (NYSE :).
After a drop of around 18% since the beginning of 2020, the Citigroup share traded around $ 67.6 per share yesterday, while JPMorgan closed at $ 121.5 after a 15% hit this year.
Although the weakening economy is certainly bad for their mergers and acquisitions, trade and corporate lending, both banks have large and diversified portfolios that place them in a much stronger position to withstand economic shocks than in the time of 2008. crisis.
According to Piper Sandler analyst Jeffery Harte, who raised JPMorgan to overweight from neutral with a $ 149 price target, the bank is a "relative winner in any macro environment." He added that he did not call a bottom of the market, but rather emphasized a potential outperformer.
We believe that both JPM and Citi are well prepared to face any recession due to their ongoing cost savings and rebalancing of portfolios over the past decade. Their efforts are beginning to pay off and both have delivered strong sales and profit growth over the past quarters, as well as a good dividend yield, with JPM at 3.1% and Citi at 3.2%.
Bottom Line
It is certainly not a good time to go long with bank stocks when the macro headwind is increasing. But in the case of long-term weakness, we advise investors to prepare to choose a number of solid bank shares. We love both Citi and JPM for such investors, given their diversified portfolios, growing dividends and improving balance sheet quality.
