US banks outperformed the broad market significantly in March 2024, for the first time since the beginning of the year. However, it was just the 5th time of outperformance over the last 14 months. Nonetheless, banks ended March in the green for the second consecutive month, and it was the 4th time of growth over the last 5 months.
EXECUTIVE SUMMARY
US banks outperformed the broad market significantly in March 2024, for the first time since the beginning of the year. However, it was just the 5th time of outperformance over the last 14 months. Nonetheless, banks ended March in the green for the second consecutive month, and it was the 4th time of growth over the last 5 months. Thus, BKX index increased by 8.4% MoM in March vs +3.1% MoM of SPX index. Absolute March 2024 performance was +1.1 std from the mean monthly performance, and it was in the top 10% of absolute monthly performance in the index history. Relative March 2024 performance was +5.2% MoM. It is +1.1 std from the mean monthly performance, and it is in the top 9% of relative performance vs SPX index since the inception of BKX index. Nonetheless, banks remained quite volatile ytd as a result of the 4Q23 earnings season, especially NYCB’s one, and resumed growth in interest rates. Thus, Citizens Financial and Citigroup were among the best performers in March, having increased by more than 15% on MoM basis. On the other hand, the key underperformers were regional banks, driven by ongoing NYCB’s negative news flow after quite weak 4Q23 results. Hence, NYCB tumbled by 33% MoM in March after declining by another 26% MoM in February, -69% ytd. Nonetheless, NYCB was the only bank from our sample which ended the month in the red, the third consecutive month of NYCB’s negative dynamics. Thus, the difference of monthly price changes between the best and the worst performers of our sample of banks was 48.4% in March resulting in an average figure of 1Q24 of 43.7% vs 22.1% in December. And it was the most volatile start of the year since GFC. So, correlation between price changes yoy and EPS FY24E changes yoy decreased notably MoM in March.
US banks continue trading with a significant discount both to historical averages and to S&P 500 Index, given quite weak performance of US financial institutions on absolute and relative basis in two recent years, even despite noticeable decline of profit and revenue estimates. However, the discount continued narrowing gradually. Thus, median P/E 24E of our group of banks increased from 10.1x (as of February 29, 2024) to 11.3x (as of March 28, 2024). In turn, median P/E 25E went up from 8.9x to 9.7x for the same period of time. Nonetheless, banks are still trading at -0.7/-0.6 std on P/E CY and at -1.1/-0.8 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 March 28, 2024). As for relative to S&P 500, banks are currently trading at -1.2 std and -1.3 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 increased from 1.11x (as of February 29, 2024) to 1.22x (as of March 28), already at the historical average. On P/B, banks are trading with no discount to the sample mean (2010-current moment) while the S&P 500 index are trading at +2.0 std, despite the 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 an impact of the 4Q23 earnings season. However, dispersion decreased somewhat in recent quarters. Nonetheless, WAL’s P/E estimates for the nearest years are around 6-8x while NTRS’s ratios are 12-14x at the moment.
The US economy growth prospects continue improving. But the flip side of the coin is the more hawkish Fed, mainly driven by higher than expected inflation data in early 2024. The latter, among other things, indicates that the economy continues to grow faster than expected, even despite mixed macro data revealed in March. So, the probability of a recession in the next 12 months is already estimated at just 35%. Moreover, GDP growth forecasts have been revised upwards again both by the market and by the Fed. Thus, according to March staff projections, the US GDP CAGR for the next three years will exceed 2.0% yoy. The market expectations are only slightly below but continue going up. On the other hand, both CPI and PPI figures missed expectations in early 2024. It doesn’t contradict the fact that inflation is moving in the right direction, but it only confirms once again that the road to the Fed’s inflation target of 2% will be quite bumpy. So, the balance of risks is still shifted towards inflation, confirming the rightness of the Fed not to rush to start the easing cycle prematurely. It doesn’t negate the fact that the rate will be inevitably cut in the near future. We expect that the first 25 bps cut will occur at the June meeting. Nonetheless, rate expectations increased substantially ytd, and we don’t expect that there will be more than 3 rate cuts in 2024 while the fed funds rate could remain above 4% till the end of 2025, implying ongoing pressure on US banks’ NII/NIM in 2024. The good news is that very high interest rates haven’t had a significant negative impact on the US economy yet but the key word is ‘yet’.
1Q24 EPS estimates continue going down despite better 4Q23 results. Reported figures were significantly distorted by one-timers but 1Q24 figures wouldn’t be clean either because of still the same DIF assessment. But it will be much lower than the 4Q23 one with a negative impact on CET1 ratio of our sample of banks of just around several bps. Despite better NII/NIM figures in 4Q23, estimates of both indicators decreased ytd, driven by higher rate expectations, ongoing growth of deposit/funding beta, subdued loan growth and weak NIBD trends. Thus, median 1Q24E NIM of our sample of banks decreased by 7 bps ytd to 2.86% as of the end of March. Moreover, NII/NIM will continue going down both on qoq and yoy bases, but the baseline scenario is still that a trough of both indicators will be reached in 2Q24 while 2025 will be a year of significant growth. Given notable growth of rate expectations, investors will focus on banking NII/NIM outlooks rather than reported numbers by themselves. Loans growth continues decelerating despite strong growth of the US economy. Thus, total loans of US banks increased just by 1.5% yoy as of mid-March with decline in C&I and consumer (except for credit cards) segments. Nonetheless, according to January SLOOS, banks expect loan demand to strengthen across all loan categories in 2024, despite deteriorating of credit quality and tighter lending standards. In turn, 1Q24 fees are expected to increase on a qoq basis due to seasonality and relatively low base of majority of fee income categories after weak performance in 2023. However, core OpEx will also increase on qoq basis due to seasonally higher compensation expenses. So, operating leverage will remain negative both in 1Q24 and in 2024. But FY24 OpEx is expected to increase just by 1%, implying that US banks could return to positive operating leverage in 2H24. But it largely will depend on how well the NII/NIM expectations in 2H24 will be met. Credit quality remained strong but deteriorating, mainly driven by cards and office CRE. Nonetheless, despite all fears, especially intensified after NYCB’s 4Q23 earnings, LLR of domestically charted banks was even negative ytd.
Mid-term earnings visibility of US banks continues improving but it is still bumpy road ahead, at least in 1H24. We expect that FY EPS of US banks will return to growth in 2025 after three consecutive years of negative dynamics. So, improved EPS growth implies gradual re-rating of US banks, which continue trading at a significant discount to SPX index. Given still high risks and ongoing decline of EPS/revenues, US banks may remain volatile in 1H24, but we believe that banks will end 2024 year in the green on a relative basis. So, we still remain bullish on the sector but recognize elevated risks.