US banks outperformed the broad market significantly in November 2024, for the second consecutive time. However, it was only the 11th time of outperformance over the last 25 months. Also, US banks ended November deep in the green, for the 4th time over the last 5 months. Moreover, it was the 9th time of growth over the last 13 months.
EXECUTIVE SUMMARY
US banks outperformed the broad market significantly in November 2024, for the second consecutive time. However, it was only the 11th time of outperformance over the last 25 months. Also, US banks ended November deep in the green, for the 4th time over the last 5 months. Moreover, it was the 9th time of growth over the last 13 months. Thus, the BKX index soared by 13.4% MoM in November vs +5.7% MoM of the SPX index. The absolute November 2024 performance was +1.8 std from the mean monthly performance, and it was in the top 5% of absolute monthly performance in the index history. The relative November 2024 performance was +7.2% MoM. It is +1.5 std from the mean monthly performance, and it is in the top 6% of relative performance vs the SPX index since the inception of the BKX index. Given quite strong performance in November, the BKX index continues outperforming the broad market ytd, +13.8% or +1.2 std. If the situation doesn’t change in December, this year will be the first time of outperformance over the last three years. All members of our sample ended November in the green. Thus, FHN and WBS, the best performers of the month, increased by 21.9% MoM and 19.3% MoM. In turn, trust banks were among the worst performers in November, driven among other things by volatility of interest rate expectations. A difference of monthly price changes between the best and the worst performers of our sample of banks was 15.8% in November vs 28.7% in October. Although the correlation between price changes yoy and EPS FY24E changes yoy decreased slightly MoM in November, after a small growth in October, it still remains quite high, staying at 77% as of the end of the month, as 1Q24 was the most volatile start of the year since GFC.
US banks continue trading with a significant discount to the broad market but already with a notable premium to historical averages. A discount to the SPX index was driven by quite weak performance of US banks on absolute and relative bases in two previous years. However, it narrowed considerably in recent months after roughly flat but volatile 1H24. Thus, median P/E 24E of our group of banks increased from 12.2x (as of October 31, 2024) to 13.8x (as of November 29, 2024). Median P/E 25E went up from 11.3x to 12.6x over the same period of time. Hence, the banks are already trading at +0.6/+0.8 std on P/E CY and at +0.7/+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 November 29, 2024). As for valuation relative to the S&P 500 index, the banks are currently trading at -1.0 std and -0.8 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 was roughly flat in 2Q24, hovering around 1.17x. However, the ratio increased notably during the recent months, rising from 1.17x (as of June 28, 2024) to 1.45x as of the end of November, the highest figure over more than 1.5 years. So, on P/B, the banks are already trading at +1.1 std from the sample mean (2010-current moment) by contrast to +2.3 std of the SPX index, despite expected ROE premiums to historical averages are roughly the same for both BKX and SPX indexes. As for individual names, multipliers are still quite different. But the dispersion across banks decreased slightly both ytd and yoy (excl. FLG’s impact). In turn, OZK’s P/E estimates for the nearest years are around 8x while CFR’s ratios are 15-17x at the moment.
Elimination of uncertainty related to the U.S. elections positively impacted on near-term GDP growth expectations. At least, market estimates of GDP growth rates in 4Q24/1Q25 increased slightly in November. Definitely, the end of election uncertainty wasn’t the only driver. Thus, consumer spending was quite strong ytd, beating consensus notably in 3Q24, but it wasn’t strong across the board, mainly driven by higher-income households. On the other hand, the labor market continues to send mixed signals. Thus, headline payrolls missed estimates significantly in October, for the third time over the last 4 months. Payrolls increased only by 12K in October vs the consensus of 100K. Of course, it was heavily impacted by hurricanes, and the November data should be much stronger. At least, ADP employment growth was solid +233K in October vs the consensus of just +111K. But the fact that the labor market continues to be a little feverish remains intact. Thus, the ratio of job openings to unemployed workers has already turned below pre-pandemic levels, falling to just 1.09x in September, near the lowest figure over more than 6 years. Moreover, given Trump’s victory and expected considerable changes to economic policy, interest rate expectations increased substantially in two recent months, even despite Powell's assurances at the last FOMC meeting that the election results would have no effects on the Fed’s policy decisions, at least near term. Anyway, inflation continues moving to the Fed’s target even if not as fast as many would like. So, we agree that the Fed will continue to cut rates in the near quarters, but uncertainty about the monetary policy in 1-2 years has certainly increased. Hence, it is still expected that the Fed will cut rates by 25 bps with a probability of 67% in December, and there will be 2-3 more rate cuts in 2025.
The first two months of 4Q24 looks like a game changer for US banks, given the better 3Q24 earnings season as well as Trump’s victory on the elections. The latter, accompanied by upcoming Republican control of both houses of the Congress, implies notable changes to economic policy, and financials could be among key beneficiaries of these changes. The market reaction to recent events speaks for itself. On the other hand, EPS estimates were roughly unchanged in November, despite the election results imply potentially a quite significant shift in banking regulation after one and half decades of regulatory tightening, especially for big banks. The changes may affect capital, costs, fees, which among other things imply higher shareholder returns through buybacks and dividends as well as growth of bank M&A. However, policy changes could lead to higher inflation and interest rates, driven by wider budget deficit and higher tariffs, which, in turn, will have a negative impact on loan growth, credit quality and capital through growth of unrealized losses on securities. After all, it will inevitably take time to be realized. In any case, the pros far outweigh the cons. The key open question is how much of potential tailwinds are already priced in, given the rally of two recent months. It should also be noted that the 3Q24 earnings season was notably better than expected, mainly driven by higher revenues, but outlooks were rather mixed, in our opinion. Thus, 24 out of 30 banks from our sample reported better than expected EPS (vs 25 banks in 2Q24). A median surprise was +8.3% in 3Q24 vs +5.4% in 2Q24. Revenue of 23 out of 30 banks from our sample exceeded estimates in 3Q24 with a median surprise of +1.1% vs 23 banks and +0.9% in 2Q24. Nonetheless, despite ongoing headwinds, we expect that NIM will again increase sequentially in 4Q24 as well as NII although loan growth remains weak but gradually accelerating. Fee income will remain key driver of revenue growth in the nearest quarters. So, we believe that even operating leverage will turn positive again in 4Q24, for the first time over the last 7 quarters, despite seasonally higher OpEx. In turn, credit quality will continue deteriorating but at slower rate even in the riskiest segments.
Fundamentals of US banks will continue improving while longer-term prospects have become more brighter in recent months. So, FY EPS of US banks will return to growth in 2025 year after three consecutive years of negative dynamics. Nonetheless, we believe that relatively high volatility both of EPS/revenue estimates and quotes will persist in the near future. On the other hand, the baseline scenario of gradual positive EPS growth of US banks remains intact. In turn, the latter we can't say so clearly about quotes of US banks after the recent rally, at least we don’t expect significant growth in the nearest quarters. So, we are again neutral on the sector given rich valuations.
Comments