US banks outperformed the broad market noticeably in August 2021, after two consecutive months of their significant underperformance.
EXECUTIVE SUMMARY
US banks outperformed the broad market noticeably in August 2021, after two consecutive months of their significant underperformance.Thus, BKX index increased by 5.2% MoM vs +2.9% MoM of SPX index, the first growth in absolute terms during last 3 months. Absolute August performance was +0.6 std from the mean monthly performance and it is in the top 23% since the index inception. Relative August performance was +2.2% MoM. It is +0.5 std from the mean monthly performance and it is in the top 28% of relative performance vs SPX index since the index inception. Despite to weak performance in June and July, banks outperformed SPX in all other months of the current year. So, the absolute performance of the first 8 months of the year is the strongest one over last 26 years while the relative performance is the strongest one over last 19 years.
US banks dynamics were relatively uniform in August with positive MoM growth for all members of BKX index except for WFC, which declined meaningfully on the last day of the month because of rumors about new claims of the regulator. The key outperformers (SBNY, ZION, GS and HBAN) added more than 10% MoM.
The loan growth of US banks still remained weak but improving. On the other hand, the Fed tries to be as dovish as it can under current circumstances, and it seems that rate expectations will be revised down in the near future, negatively impacting on estimates of banking fundamentals. Notwithstanding, the estimates still continue going up, driven by clearly strong 2Q21 results, ongoing improvement of the economic outlook and rising inflation. Thus, 3Q21 EPS estimates were revised up by 0.4% MoM in August, or +34.7% ytd. FY21 EPS increased by 0.3% MoM, or +54% ytd. In turn, FY22 EPS estimates were flat MoM, but +12.8% ytd, being markedly slower comparing to the quote growth of US banks in 2021. FY21 revenue projections were also almost unchanged MoM, but +4.9% ytd. On the other hand, banks are still trading with a significant discount to S&P 500 but it is no more trading with a substantial discount to their historical averages. Thus, banks are trading with -0.9/-0.8 std on P/E CY but +0.4/+0.6 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 August 27, 2021). As for relative to S&P 500, banks are currently trading at -1.8 std and -1.3 std from the sample mean (2010-current moment) for P/E CY and P/E NY, respectively. On P/B, banks are trading with +0.7 std from the sample mean (2010-current moment) vs SPX with +2.9 std. So, we no more expect an outperformance of US banks vs the broad market given their rich valuations and a lack of catalysts for an acceleration of the profit growth, at least near term. But we think that the loan growth acceleration will help banks to avoid underperformance vs SPX, at least in the near term.
EU banks increased markedly on an absolute basis in August 2021 as well, after two consecutive months of negative dynamics. They outperformed the broad market slightly, for the first month over recent three. Thus, on an absolute basis, SX7P increased by 2.2% MoM in August, or +0.3 std from the mean, and it is the top 41% of absolute monthly performance of SX7P index. On the other hand, relative monthly performance was just +0.2% MoM, or +0.1 std, but it is in the top 43% of relative monthly performance in SX7P index history. Notwithstanding, it was very strong price performance during the first eight months of the year, +25.8% ytd, after clearly weak dynamics in three previous years. However, SX7P index underperformed in each of last 3 years and it is still 26.2% lower than it was at the end of 2017, underperforming STOXX 600 index by 39% over this period.
The key EU outperformers were banks, which released relatively good quarterly results. Thus, ABN Amro increased by 20.4% MoM in August, driven by a growth of 8.6% on the day of 2Q21 earnings. On the other hand, banks with weaker quarterly results underperformed.
European banks reported markedly better results in 2Q21 as they did in four previous quarters after clearly weak figures in 1Q20. Both revenue and net income demonstrated positive surprises. Thus, 27 out of 32 banks from SX7P index for which estimates were available reported better revenue figures vs 30 out of 35 in 1Q21. Net income was also better than expected with 23 out of 30 banks with positive surprises vs 25 out of 27 in 1Q21. EPS was higher for 25 out of 30 banks with available estimates in 2Q21 vs 30 out of 30 banks in 1Q21. The key driver of better results was lower provisions due to the better economic outlook and the ongoing revenue momentum. Even NII/NIM figures weren’t weak as it was in the previous quarters, although the prospects for an acceleration of NII growth in coming years still remain questionable, given expected pace of key rates dynamics. Notwithstanding, the earnings momentum continues improving after its significant worsening in 1H20. Thus, the median growth of operating profit of SX7P index members was +43% in 2Q21 vs +30% in 1Q21, but -37% yoy in 4Q20. The median growth of revenue was 4.2% yoy in 2Q21 (even +0.2% vs 4Q19) after it increased by 5.6% yoy in 1Q21, following negative dynamics over four consecutive quarters. In turn, the median revenue surprise was +2.2%, markedly better than a median quarterly surprise over the last 10 years of 1.1%, but lower than +3.8% in 1Q21. The revenue growth was driven by non-II which skyrocketed by 13.3% in 2Q21, the second consecutive quarter of its substantial growth after weak dynamics in three previous quarters. Despite better earnings season, the acceleration of the recovery and lifting restrictions on capital deployment, market perception of the results was restrained. Thus, a median 1-day performance of SX7P index members around the earnings date was +1.1% vs 10yr average of +0.2% and 1Q21 figure of +0.3%. On the other hand, the overall performance since the start of the earnings season was relatively weak with a growth of SX7P index of 2.0% (from July 12, 2021 till the end of August 2021), while STOXX 600 index increased by 2.2% over the same period.
The median growth of EU banks’ net income (SX7P index members) was 102% yoy in 2Q21 after the median growth of 56% yoy in 1Q21 and the decline of 41% yoy in 4Q20. Of course, such an impressive growth is primarily due to the effect of a low base. Moreover, 2Q21 net income was even 9% higher than 4Q19 one due to significant reserve releases. Thus, provisions decreased by 85% yoy and provisions were negative for 12 members of SX7P index out of 38 (vs 6 banks in 1Q21). Notwithstanding, consensus forecasts still imply that FY22 NI will be lower by 25% vs FY19 NI. Also, median ROE of EU banks markedly increased on a quarterly basis in 2Q21 but it still remains lower than it was in 2019. Thus, median ROE increased by 188 bps qoq, or 159 bps yoy, to 7% in 2Q21 while it exceeded 8% in 2019. Due to positive EPS surprise and improved economic expectations, the estimates have increased meaningfully in recent months. Thus, the median growth of FY21 NI was +45% ytd (but -8.9% since the beginning of 2020), implying a growth of 58% yoy. As of FY22 NI estimates, the median growth was +12.4% ytd (but -6.9% since the beginning of 2020), implying a growth of 3.3% yoy. On the other hand, revenue estimates added 3.5% ytd for FY21, but still -4.5% since the beginning of 2020.
As a result of better earnings season and better earnings visibility due to the ongoing vaccination campaign and an expected GDP growth acceleration, we anticipate that the growth of EU banks’ quotes could continue in the near future, but we no more expect their substantial outperformance vs the broad market given their rich valuations. EU banks are no longer traded with a discount to their historical averages while a discount to US peers is just slightly wider than it was historically. Thus, a premium to historical averages is 3.0% (+0.2 std at the moment from mean P/E NY of SX7P index members, sample from 2010 to the present moment) but a discount to US peers (on median P/E NY of BKX index vs SX7P index) is 25% as of August 27, 2021 vs an average since 2010 of 21%, or -0.4 std. On the other hand, due to meaningful EPS upgrades, EU banks still don’t look very expensive either, even after the significant quotes growth ytd.