The World’s Bank Stocks Price In ‘Armageddon’ as Buyers Flee

(Bloomberg) -- If the world’s banks are in much better shape this time round, it’s little consolation for their shareholders nursing historic losses.

As the coronavirus pandemic sparks corporate defaults, interest rate cuts and trading losses, investors have been punishing the sector with an intensity reminiscent of the global financial crisis.

Developed bank equities have plunged to a record low versus the wider market. U.S. lenders have sunk below 2008 levels compared with their large-cap peers. Institutions in the euro zone have traded at a 70% discount to book value -- worse than the dark days of the euro debt debacle.

Sure, central bankers have boosted bank liquidity, capital and funding, deposits are in rude health and post-crisis regulations have eased systemic risks.

But thanks to the epic collapse in aggregate demand, the sector is offering little upside despite cheap valuations while dividend cuts leave its core investor base reeling.

No wonder the marginal buyer is vanishing.

Just ask Guy de Blonay, who first launched a financial-sector fund in the heyday of banks after the dot-com bubble burst. Two decades on, even the Jupiter Asset Management portfolio manager finds himself more enamored with the likes of Visa Inc. and PayPal Holdings Inc. than the storied names of financial intermediation.

“Having to face shutdowns of the economy around the globe is obviously going to affect banks more than any other sector,” he said from London. “You got share prices that have gone down even further, pricing in Armageddon.”

The Covid-19 pandemic imperils nearly every line in banks’ results due next week, from defaults that drive up impairments to demand for corporate deals, loans and payment processing. The unprecedented wave of monetary easing is also further squeezing net-interest margins.

In de Blonay’s 433 million-pound ($534 million) Jupiter Financial Opportunities Fund, banks only made up 6% of its holdings as of March. The fund has handily beaten its benchmark over the past five years. One reason: It holds not a single lender from the euro area or U.K. and just a few in the U.S. and Switzerland.

Another challenge was laid bare last Wednesday when U.K. banks plunged 10% after collectively canceling share buybacks and dividends thanks to regulatory pressure. With policy makers tightening the screw on payouts, Europe’s dividend futures have collapsed even more than stock benchmarks.

To Barry Norris, who runs the hedge fund Argonaut Capital Partners LLP, it confirms his long-held view that Western European banks are uninvestable.

“In a lot of these sunset industries, the only way investors get hooked on the equity story is for dividends because there’s very little growth, very little terminal value and there’s not really a narrative,” he said from London. “That’s just proven to be a complete illusion.”

Norris hasn’t owned a single stock among them in at least a decade and is shorting the Bank of Ireland.

Over in the U.S., the virus now looks set to cut earnings estimates across the sector. Under new accounting rules that took effect in January, the biggest U.S. banks also have to recognize potential loan losses more quickly, a shift that means share buybacks are unlikely for at least the rest of the year.

“Shareholders are taking a back seat to customers (fee waivers, forbearance), employees (the largest banks suspended layoffs), communities (more donations), and regulators (suspension of buybacks for the largest banks),” Wells Fargo Securities analysts led by Mike Mayo wrote in a note that reduced profit forecasts.

Even the market volatility of late isn’t much helping trading revenues for the large Wall Street institutions overall.

In Europe, a lost decade in bank earnings has left capital concerns and non-performing loans in its wake. But it’s also boosted the relative standing of American banks along the way.

Pierre Mouton, head of long-only strategies at Notz Stucki & Cie., for one is happy to hold JPMorgan Chase & Co. -- which has famously emerged stronger since the crisis -- but no banks from Europe even before the pandemic.

It’s not all gloom. In contrast to stocks, banks’ riskiest debt known as Additional Tier 1 notes have rebounded since late March, a counterpoint to those concerned about capital ratios. And rock-bottom valuations are piquing Patrick Kaser’s interest at Brandywine Global. He’s been adding large banks the likes of Wells Fargo & Co. and Citigroup Inc.

U.S. banks outperformed as the S&P 500 surged on Monday amid signs of the coronavirus outbreak easing, and following a series of measures taken to support lenders.

“Even in a bad outcome the stocks are meaningfully mispriced and meaningfully undervalued,” the portfolio manager said.

But for all that, de Blonay at Jupiter Financial isn’t sure there’s a bullish case for banks overall. The ability to adapt to a low-rates world will differentiate the winners from losers, he said.

“Taking into account the rise in cost of risk, the uncertainty of where we’re going with this pandemic -- and the fact that we don’t have dividends there to support share prices -- it’s difficult to say outright that it’s cheap,” he said.

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