Bank stocks took a tumble recently after skyrocketing earlier in the year, as investors worried about Europe’s problems and signs of slower U.S. economic growth. A lot of the fundamentals of bank balance sheets and profitability really are improving, but for now investors seem to be more worried about global and U.S. economic instability. With bank stocks so closely tied to general feelings about the economy, the volatility in the sector seems here to stay. Meanwhile, not much has changed this year in the regulatory environment—most of the Dodd-Frank Act rules haven’t been finalized yet and there is much uncertainty about how those rules will impact banks. One thing the U.S. government does want to put behind it is the Troubled Asset Relief Program, and the U.S. Treasury has begun auctioning off its stock in banks. States that still have high concentrations of TARP banks are those that have been struggling with housing problems or have a lot of institutions that have yet to recover from the recession.
Ken Usdin is a managing director in the equity research department for Jefferies & Co. in New York, where he covers large regionals such as Fifth Third Bancorp and BB&T Corp.
We’ve seen the banking sector outperform the S&P 500 this year, but bank stocks haven’t done so well since March. Why?
There is not a lot of conviction about the macro-economy and Europe. There are concerns about the election here in the U.S. There is a slowing rate of economic growth in the U.S. I think the market for the bank stocks is going to be pretty choppy for the next several months.
What are your favorite stocks?
PNC Bank is one of the high quality banks. They have a good growth trajectory—they just bought Royal Bank of Canada’s business in the U.S. so they’ll have some cost savings from that and some growth opportunities as they start to move their people and processes into a new territory for them, which is the Southeast. They have a conservative credit portfolio and [the stock] has a reasonable valuation. I’ve been of the view that you need to have high quality and low quality names. What happens is when people get fearful of the market, people tend to hold onto high quality names and sell their low quality ones. The [low quality] story we like the most is SunTrust Banks. What I like about that is they have a bunch of cost savings programs they’ve implemented. They’ve had a bigger burden relative to other banks from the credit crisis, especially from mortgages. As those costs continue to abate, they’ll have a nice pickup in earnings.
For a longer version of this interview and more data on bank stocks, see Analyst Forum at BankDirector.com.
Peyton Green, managing director at Sterne, Agee & Leach, follows up on his prediction earlier this year that bank stocks would do better than many people thought. His top picks improved or stayed flat year to date through mid-June: MB Financial Inc., UMB Financial Corp. and TCF Financial Corp.
“The quality banks have done better than people expected,’’ he said. “We still like UMB. TCF Financial is more of a recovery play and we think the recovery is still in the future. Those stocks that are doing well are UMB or Signature Bank, or Pinnacle Financial. I think it’s going to be a tough year, including what is happening in Europe. The national economy is not giving us much hope, but there are local economies that are doing better and that is getting the attention of investors. You have to be selective.”