Analyst Warns It’s ‘Getting Weird Out There’ for Banks
(Bloomberg) -- Baird is starting 2020 with a warning note for bank investors as earnings growth and credit trends may disappoint, while optimism surrounding a trade deal is likely already baked into stock prices.
Things are “getting weird out there,” analyst David George wrote in a banks outlook for the year. “With sentiment more bullish and valuations higher despite the later-cycle risks, we believe investors should avoid chasing stocks,” he said. Instead, he suggested trimming exposure “to the extent the market melt-up continues,” and downgraded Wells Fargo & Co. to underperform from neutral as part of that “more cautious industry view.”
George flagged 2019’s 32% rally in the KBW Bank Index even as “many aspects of the narrative” have become “harder to rationalize.”
He cited long-standing expectations for a trade deal; a spike in insider selling; the potential for consumer activity to cool while the economy chugs along, but doesn’t speed up; regulatory and accounting changes that are “mostly non-events,” and credit “complacency,” even though high-yield spreads are near cycle lows with leverage back near peaks. He also noted the possibility that going long on mega-cap banks is “now a crowded trade,” as relative valuations are at multi-decade highs.
Regarding Wells Fargo, George said he likes new CEO Charlie Scharf, but his team “may initially lower expectations and provide an extended timetable for improving operating leverage.”
George’s downgrade followed a warning last month from Cowen that the bank may face political trouble this year, with mounting risk as Democrats take aim. Odeon’s Dick Bove also cut Wells Fargo to sell last month, as the bank appeared “directionless,” even with its compelling consumer business.
Wells Fargo shares fell as much as 0.4% in early trading on Thursday, while other big banks and U.S. stocks in general rose across the board. The stock had dropped about 1.2% in the past month versus a 3.3% gain for the KBW Bank Index.
George was more positive on other bank stocks. He called PNC Financial Services Group “quality at a reasonable price,” as it’s been aggressively investing in technology and organic growth and offers a better credit profile than peers. He flagged “better value ideas” Capital One Financial Corp. and Citizens Financial Group, and said Synovus Financial Corp. was his favorite mid-cap due to steady organic growth, solid credit performance and “improving industry M&A sentiment.”
©2020 Bloomberg L.P.