US banks underperformed the broad market noticeably in April 2022, for the second month in a row, after relatively strong dynamics in the first two months of the year.
EXECUTIVE SUMMARY US banks underperformed the broad market noticeably in April 2022, for the second month in a row, after relatively strong dynamics in the first two months of the year. Thus, BKX index tumbled by 11.3% MoM vs -8.8% MoM of SPX index. Absolute April performance was -1.7 std from the mean monthly performance and it is in the bottom 5% since the index inception. Relative April performance was -2.8% MoM. It is -0.6 std from the mean monthly performance and it is in the bottom 23% of relative performance vs SPX index since the index inception. Despite much higher rate expectations, US banks underperformed the broad market significantly in two recent months as a result of much higher geopolitical risks and expected noticeable deceleration of US GDP growth.
US banks' dynamics were relatively uniform in April 2022 with negative dynamics for all our group of banks, except for 2 financial institutions.Among the worst performers were Trust banks because of weaker 1Q22 results. STT lost more than 20% of market cap in April. The best performer during the month, namely SYF, added 5.7% MoM.
US banks reported mixed 1Q22 results with noticeably higher net income numbers but roughly in-line revenues, after there were much better both revenues and EPS figures in 7 previous quarters.The key drivers of profit beat were better NII/NIM figures and ongoing reserve releasing as asset quality remains solid. On the other hand, fee income and capital ratios were lower than expected. The loan growth remains quite strong and even accelerating despite relatively weak dynamics in January 2022 and a growth of the recession risks. Given the very hawkish Fed and an explosive growth of the rate expectations, it is undoubtedly that NIM will turn from a headwind into a tailwind already in the nearest future. Thus, median NIM 2022E of BKX index members increased by 16.2 bps ytd to 2.56% as of the end of April 2022, while NIM 2023E skyrocketed by 21.5 bps ytd to 2.74%. During the earnings season, banks have also started to revise NII/NIM projections up. So, although the process of releasing reserves has come to an end, which will lead to weaker EPS figures on a yoy basis in coming quarters, we see a room for further EPS growth in 2023 and 2024 years, even taking into account the growth of uncertainty related to future economic growth. The latter was the key driver of banking underperformance in the recent months. Nonetheless, we believe that the rally may be resumed in the near future, given the fact that despite mixed results 1Q22 earnings season was quite encouraging for future dynamics of key operating metrics, at least in the near term, while US banks multipliers remain quite low both vs historical averages and vs S&P 500.
Banks beat expectations markedly in 1Q22 with better EPS figure for 19 out of 24 participants of BKX index vs 20 positive surprises in 4Q21 and better results for 22 banks in 3Q21.Median EPS surprise of BKX index members was +7.7% vs the median quarterly figure for current BKX index members over the last 15 years of 3.8%. Revenue surprise was positive again, but just +0.2% (the lowest revenue surprise over the last 13 quarters) vs the median quarterly figure for current BKX index members over the last 15 years of 1.1%. Just 12 members of BKX index beat expectations in 1Q22 vs 17 in 4Q21 and 19 in 3Q21. Unsurprisingly, market perception of the results was negative again. Median percent change in price around the earnings date of BKX index members was -0.7%, the second consecutive quarter of negative performance, and a noticeably deeper decline than the median figure over the last 15 years of -0.3%. On the other hand, unlike to the previous quarter, BKX index dynamics in the first two weeks after the start of the earnings season was roughly in-line with S&P 500 index dynamics. Nonetheless, consensus estimates dynamics were positive as higher NII/NIM forecasts offset completely a negative impact of weaker fees. Thus, 2Q22 EPS estimates were revised down by -0.8% since April 12, 2022, till the end of the month (the median of BKX index members), but it was +4.3% ytd, FY22 EPS estimates were +2.1% since the start of the earnings season, or +4.6% ytd, while the median change of FY23 EPS estimates was +0.9% since April 12, 2022, or +6.1% ytd. Also, the median revenue FY22 growth was +0.5% since the start of 1Q22 earnings season, or +2.5% ytd, respectively.
Overall, underlying trends of US banks remain quite strong with still solid but decreasing profitability. Due to NI beat and lower than expected equity, ROE remained double-digit and was noticeably better than expected in 1Q22 but lower than it was one year ago. Thus, ROE decreased by 269 bps yoy to 10.7% in 1Q22, -40 bps vs the average quarterly figure of 2019 and -94 bps qoq. Despite ROE/ROA figures should remain weaker on yoy basis in the nearest quarters because of provisions normalization, we expect that ratios will start to improve in 2H22 and it is quite probable that it will exceed the average figure of the last cycle in the nearest 1-2 years due to loan growth acceleration and noticeably higher expectations on rates. Nonetheless, banks continue underperforming ytd despite a substantial growth of profit estimates. So, banks are again trading at a substantial discount to their historical averages, while a discount to S&P 500 still remains relatively large. Thus, banks are trading at -1.6/-1.4 std on P/E CY and at -2.0/-1.7 std on P/E NY (on the basis of samples from 2000 and 2010 years to the current moment) relative to their historical averages (as of April 29, 2022). As for relative to S&P 500, banks are currently trading at -1.3 std and -1.7 std from the sample mean (2010-current moment) for P/E CY and P/E NY, respectively. On P/B, banks are trading with +0.9 std from the sample mean (2010-current moment) vs SPX with +1.7 std.
EU banks decreased on both an absolute basis and a relative basis in April 2022 for the third month in a row after two consecutive months of significant growth in absolute terms. Thus, on an absolute basis, SX7P decreased by 3.3% MoM in April, or -0.5 std from the mean, and it is in the bottom 24% of absolute monthly performance of SX7P index. In turn, relative monthly performance was -2.1% MoM, or -0.5 std, and it was in the bottom 27% of relative monthly performance in SX7P index history. Nonetheless, EU banks still continue outperforming the broad market slightly in 2022 after clearly strong 2021 year when they added 34% (+9.6% on relative basis). On the other hand, SX7P index underperformed in each of 2018-2020 years. So, it is still 28.1% lower than it was at the end of 2017, underperforming STOXX 600 index by 37.9% over this period.
Dynamics of EU banks were quite mixed in April 2022 again and it was driven mainly by 1Q22 earnings. Among the key underperformers were Deutsche Bank and Raiffeisen Bank, which lost more than 15% MoM. Sweden banks were the best performers in April, adding 8.9% MoM and more.
European banks' dynamics remain relatively flat after their substantial decline at the end of February and early March of 2022, driven by much higher risks for the EU economy because of Russia’s invasion of Ukraine, which would undoubtedly have a material impact on economic activity in the euro area through higher energy and other commodity prices, the disruption of international commerce and noticeably higher inflation. Nonetheless, recent macro data were quite solid while the ECB is getting more and more hawkish. The start of the earnings season was also encouraging with better than expected profit figures for the majority of SX7P index members. Nonetheless, we remain cautious about EU banks’ prospects as we can’t answer no to the key question about possible recession in the EU in the near future with certainty. Moreover, EU banks don’t look very cheap at the moment. Thus, a discount to historical averages is 21% (-1.2 std at the moment from mean P/E NY of SX7P index members, sample from 2010 to the present), but a discount to US peers (on median P/E NY of BKX index vs SX7P index) is 21% as of April 29, 2022, in-line with the average since 2010, or even +0.1 std. A discount to the broad EU market is more than 43% vs the average of 30%, or -1.5 std. So we still prefer US banks over EU financial institutions.