Week-Long Carnage in Bank Stocks Is Now Worst Slide of Trump Era
Anxiety has intensified since Friday, when Fed data showed a contraction in commercial and industrial lending.
(Bloomberg) -- It’s tough all around the market, but in few places is the pain more pronounced than bank stocks.
Signs of muted loan growth and concern the economy will buckle under a tighter Federal Reserve have combined to push America’s largest banks down 11 percent since Dec. 4. That’s the worst five-day retreat since 2015.
The sector is on track for its biggest quarterly drop since 2011. Anxiety has intensified since Friday, when Fed data showed a contraction in commercial and industrial lending.
Banks used to be viewed as big beneficiaries of rising rates, but now their declines are snowballing as worries touch everything from the economy to a gradual decline in the quality of lending and a bear market in corporate bonds.
Earnings expectations for financial firms aren’t so terrible, compared with the rest of the market. Analyst estimates compiled by Bloomberg put fourth-quarter profit growth at 16.8 percent, slightly above the rate for the S&P 500 and better than all but two other industries.
The problem is, sentiment toward those projections is rapidly deteriorating. Since the end of September, analysts have trimmed profit estimates for the current quarter by 5.4 percentage points. That’s more than the 3.6-point reduction experienced by the broad market.
Is anyone escaping the meltdown? Not mutual funds, which counted the group as their second-most favored sector at the end of September, according to Goldman Sachs data. Hedge funds look a little more prescient. Those managers held fewer financial shares relative to benchmarks, with their exposure trailing all other industries except for technology.
Average valuations in the group sit just below 11 times annual earnings, near the lowest level since 2012, but analysts disagree over whether that makes them cheap. Deutsche Bank’s Matthew O’Connor says it’s way overdone. Banks have been stuck in a bear market for 45 weeks, the fifth-longest since 1966, he wrote in a note to clients. That’s too much since no meaningful economic slowdown is expected in next six-to-nine months, he said.
Morgan Stanley is less optimistic. To analyst Ken Zerbe, the sector is prone to further weakness if economic fundamentals don’t improve, he wrote in a note on Tuesday. Weakening growth and losses in corporate credit are particularly painful for mid-cap lenders, according to Zerbe, who sees an icy season for banks with market caps of less than $10 billion.
“The carefree days of rising rates and pristine credit quality could be coming to an end,” Zerbe wrote in the note. “We cannot ignore the growing risk of a bear credit market next year preceding a recession as well as the negative impact of weaker economic growth.”
In trying to sort winners from losers, Deutsche Bank’s O’Connor is most positive on brokers such as Morgan Stanley and Goldman Sachs Group Inc, along with lower-multiple large regional banks like Citizens Financial Group. Inc. All told, every stock in the KBW Bank Index is down this quarter. SVB Financial Group has fallen the most, down 35 percent . State Street Corp. is down 25 percent. Citigroup Inc. is down 22 percent, on track for its biggest quarterly drop since 2012.
--With assistance from Lu Wang.
To contact the reporters on this story: Elena Popina in New York at epopina@bloomberg.net;Felice Maranz in New York at fmaranz@bloomberg.net
To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Chris Nagi, Richard Richtmyer
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