NEW YORK: US bank stocks are morphing from leaders into losers amid more signs that their searing 35% rally through this year’s first five months may have outrun the fundamentals.
With two weeks left in the quarter, some investors aren’t waiting around to find out. The S&P 500 Banks Index, which rose three times more than the broad market through May, slid 8.1% last week and more than 10% so far this month.
This left indexes of the largest US diversified lenders and regional banks ranking among June’s worst performers, with Citigroup Inc’s drop of 14% leading its money-centre peers and Regions Financial Corp slumping 17%.
The selloff coincides with the plateauing of earnings estimates and a rotation into growth stocks from value. It didn’t help that leaders of the biggest banks started the week by warning about a slump in trading revenue. Without stronger lending and a boost from higher interest rates, earnings probably won’t pick up.
“I am troubled by the lack of supporting data on these companies,” veteran bank analyst Dick Bove of Odeon Capital Group said in an email. Multiples were reaching 10-year highs, Bove said, even though “there is no evidence to date that this recovery is underway.”
JPMorgan Chase & Co, the largest US bank, set the tone last Monday when chief executive officer Jamie Dimon warned that net interest income will be lower than previously anticipated, and that second-quarter trading revenue would be 38% below where it was a year ago.
A similar message from Citigroup chief financial officer Mark Mason sent the lender spiralling by as much as 5% on Wednesday.
Trading is more important to the big money-centre institutions that run investment banks, but sluggish loan growth has also been a drag, and that’s central to the fortunes of regional banks.
Profits have been helped by releasing reserves that had been set aside to cover loan losses that never materialised, thanks to massive federal stimulus programmes that kept defaults at bay, but those releases are one-shot gains.
Loans bring in earnings that are more repeatable, but Bove said the industry’s commercial loan volume is “at recession levels,” with home mortgages on bank books shrinking and credit-card loans under pressure.
Bank of America Corp CEO Brian Moynihan offered a more upbeat assessment on Bloomberg TV on Thursday, saying that demand was starting to pick up – “better than it was last fall or coming into the early spring.” — Bloomberg