US banks underperformed the broad market again in May 2023, for the 6th time over the last 7 months. Moreover, BKX index ended the month in the red for the 4th consecutive month.
US banks underperformed the broad market again in May 2023, for the 6th time over the last 7 months. Moreover, BKX index ended the month in the red for the 4th consecutive month. The index decreased by 6.3% MoM in May vs +0.2% MoM of SPX index. Absolute May performance was -1.0 std from the mean monthly performance, and it was in the bottom 14% of absolute monthly performance in the index history. Relative May performance was -6.5% MoM. It is -1.3 std from the mean monthly performance, and it is in the bottom 8% of relative performance vs SPX index since the inception of BKX index. On an absolute basis, it was the weakest start of the year (the first 5 months) since the pandemic, and the second weakest performance in decades. So, BKX index has almost halved from its all-time high, shown in January 2022. Despite the fact that the acute part of the crisis is over, at least from our point of view, we still see the ripple effects of the recent banking turmoil. So, the regional banks were again the key underperformers in May. Thus, each of CFG, CMA and KEY decreased by more than 16% MoM.
US banks continue trading with a significant discount both to historical averages and to S&P 500 Index, given significant underperformance of US financial institutions both on absolute and relative bases ytd as well as relative resilience of profit estimates. Thus, median P/E 23E of our group of banks increased from 7.75x (as of April 28, 2023) to 7.95x (as of May 26, 2023). In turn, median P/E 24E decreased from 7.77x to 7.59x for the same period of time. Thus, banks are trading at -2.8/-2.7 std on P/E CY and at -2.5/-2.2 std on P/E NY (on the basis of samples from 2000 and 2010 years to the current moment) relative to historical averages (as of May 26, 2023). As for relative to S&P 500, banks are currently trading at -2.1 std and -2.0 std from the sample mean (2010-current moment) for P/E CY and P/E NY, respectively. Median P/B of our group of banks decreased from 1.07x (as of April 28, 2023) to 1.02x (as of May 26, 2023), still remaining noticeably below historical average. On P/B, banks are trading with a discount of -0.8 std from the sample mean (2010-current moment) vs SPX with +1.3 std, despite current ROE premium to historical averages are roughly the same for both BKX and SPX indexes. As for individual names, multipliers are still quite different, and dispersion across banks has increased noticeably ytd, which is not surprising given the recent regional banking crisis. Thus, WAL’s P/E estimates for the nearest two years are around 4x while CFR’s figures are higher than 10x.
Overall, underlying trends of US banks remain strong but deteriorating, and the speed of deteriorating has accelerated recently due to negative impact of the regional banking crisis on both revenue and profit. The impact of the Spring banking turmoil will be even more pronounced in 2Q23 results. Thus, median decline of 2Q23 revenue estimates of BKX index members was 2.2% qtd or -1.5% ytd (as of May 31, 2023), driven by NII decline as a result of higher funding costs. Median decline of 2Q23 EPS estimates was even higher, -11% ytd as of the end of May. Moreover, from our point of view, there are still almost no positive drivers for US banking quotes left except for valuations, at least at the moment. Thus, NIM/NII is expected to deteriorate in the nearest future, while fee income will remain weak. OpEx looks controllable but growing. Credit quality is quite strong but deteriorating as well as loan growth. In turn, investors remain quite cautious due to the recent bank run and an expected recession, while regulation will be tightened in long-term with a very high probability. Despite it is LT risk, the influence of this factor is already embedded in quotes, at least partially. To everything else, US banks reported quite mixed 1Q23 results – EPS surprises were only slightly higher than expected, mainly due to strong surprises of money centers, while revenues were roughly in line. On the other hand, we don’t expect that the recession will be a deep one. So, taking into account that BKX index has already almost halved from its 2022 high, we believe that banking stocks are not very far from the trough of the cycle, at least in the baseline scenario of no significant growth of unemployment. However, we expect that banking quotes will remain quite volatile in the near term even despite to the fact that trust in the system has already largely recovered thanks to the rather prompt intervention of regulators. So, we remain neutral on US banks given still relatively high uncertainty about fundamentals dynamics in the near future, but we are gradually becoming more optimistic (cautiously optimistic), taking into account current low valuations and US banks performance ytd.