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Bank Stocks Are Getting Cheaper; Time To Buy?

By Haris Anwar/Investing.comStock MarketsJun 22, 2021 09:13AM ET
www.investing.com/analysis/bank-stocks-are-getting-cheaper-time-to-buy-200587427
Bank Stocks Are Getting Cheaper; Time To Buy?
By Haris Anwar/Investing.com   |  Jun 22, 2021 09:13AM ET
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After a powerful rally this year, bank stocks have lost some of their shine in recent days. 

The KBW Bank Index, which had surged about 40% until mid-June, is now down more than 10% from that level. Losses in the group have been led by some of the largest lenders in the U.S., with Citigroup (NYSE:C) dropping 14% and Regions Financial (NYSE:RF) slumping 17%.

So, what’s behind this sudden change of heart on the financial sector by investors?

It’s perhaps a threat that upcoming earnings could disappoint after surprisingly robust performances during the pandemic.

JPMorgan Chase (NYSE:JPM) Chief Executive Officer Jamie Dimon warned investors last week that the lender’s trading revenues, one of the biggest boosters during the pandemic, could fall 38% from a year ago to less than $6 billion in the second quarter. That tally could end up lower than the already reduced average analyst estimate of $6.5 billion.

As well, Citigroup shares fell the most in five months on June 16 after the bank warned expenses would increase sharply as it invests to satisfy a pair of consent orders from regulators. Expenses in the second quarter will likely jump to “somewhere in the middle” of a range of $11.2 billion to $11.6 billion, Chief Financial Officer Mark Mason told investors at a virtual conference. That compares with costs of $10.4 billion a year earlier.

Citigroup Weekly Chart.
Citigroup Weekly Chart.

Pent-Up Credit Demand

U.S. bank stocks have outperformed the benchmark S&P 500 Index by a big margin this year on optimism that higher trading volumes, the reopening of the economy and a spending binge by consumers will continue to fuel earnings. Some of these assessments, in our view, still hold.

For example, there remains a huge pent-up demand for credit that got hammered during the pandemic. From individual borrowers to large corporations, 2020 was the year when spending plans were scrapped as lockdowns forced potential borrowers to preserve cash and cut costs.

That situation is unlikely to persist as the U.S. economy fully reopens as planned this year. Combined with the government’s massive infrastructure spending, and a gradual tapering off monetary stimulus, banks could see demand for credit pick up substantially during the rest of 2021.

Gerard Cassidy at RBC Capital Markets said in a Bloomberg report that bank stocks are a buy on weakness because loan growth will come after companies and individuals use up their liquidity accumulated during the pandemic.

What’s more, credit quality is strong and margins could improve next year as short-term rates rise. “Combine that with increased loan growth, the revenue growth picture could turn out to be very positive for the banks in 2022,” he said.

Another reason that makes some lenders attractive in this low-rate environment is the possibility they could accelerate their share buyback plans and increase  dividends after the Federal Reserve stress test, results of which the regulator will release on June 24.

The test examines how big bank portfolios would perform in a hypothetical economic downturn. The biggest banks in America—a group that includes JPMorgan and Goldman Sachs (NYSE:GS) as well as Bank of America (NYSE:BAC)—must do well on the tests before they can return money to shareholders. Analysts are confident the banks will have no problem passing.  

Bank Of America Weekly Chart.
Bank Of America Weekly Chart.

Bottom Line

The economic backdrop is still favorable for banks, making their shares attractive after the recent sell-off. Investors who want some banking exposure might consider adding such solid names as JPM and Bank of America to their portfolios. These top lenders, due to their diversified business models, are in a better position to outperform than smaller regional players.

Bank Stocks Are Getting Cheaper; Time To Buy?
 

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Bank Stocks Are Getting Cheaper; Time To Buy?

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Comments (10)
Gerald Minster
Gerald Minster Jun 25, 2021 11:15AM ET
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Mr. Anwar, You are spot on about the banks; however, I would also place Wells Fargo - WFC in the basket of Banks to buy. The new CEO Charley Schaff has done a wonderful job on turning the bank around, finding cost saving measures and its only a matter of time before the asset cap is lifted. I expect WFC will be pushing $70 per share by end if 2022 to midway 2023
James Pattison
James Pattison Jun 25, 2021 9:15AM ET
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Big banks make more money causing a crisis and getting bailed out by the tax payer than making money the old fashioned way… commercial mprtgage back security crisis is on its way…
Gerald Minster
Gerald Minster Jun 25, 2021 9:15AM ET
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Tell me, what large bank was bailed out by taxpayers during the pandemic? What proof do you have that a commercial mortgage crisis is on the way? Not sure you know what you are talking about. The taxpayers and small businesses are the ones who got bailed out during the pandemic. People fo not want to go back to work becsuse they are making easy money off others/government.
Brian Chong
Brian Chong Jun 23, 2021 7:54PM ET
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cheaper to what?
Rockwell Tora
Rockwell Tora Jun 22, 2021 5:25PM ET
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Time to grabbing
Gene Kret
Gene Kret Jun 22, 2021 5:17PM ET
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Short Citi
Sky let
Sky let Jun 22, 2021 1:42PM ET
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Time to grab...
Jonathan Nelson
Jonathan Nelson Jun 22, 2021 1:15PM ET
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Banks are the cheapest buy right now. Stress test results should be very good. I expect financials to be back near or above their recent highs by Q3 to Q4.
Edgar Pineda
Edgar Pineda Jun 22, 2021 1:13PM ET
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totally agree, time to buy puts on banks? I been comparing the charts of 15minutes / 1 day for banks and it looks a downtrend is beginning for banks ! Whats your opinion , please.
Raul Rufin
Raul Rufin Jun 22, 2021 1:13PM ET
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I think investors define their own valuations - making the future unpredictable - and you should too. Most investments (with enough research on the brand) pan out to be relatively successful: not everything will be 15x profits, but 15% is doable + it makes more sense to buy in on something you can learn movements on.Basically, I see a falling knife as a gamble, but a profitable gamble if you see yourself holding + investing more money periodically.
Kevin Avila
Kevin Avila Jun 22, 2021 1:01PM ET
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Not until after the crash…
Alberello Mac
Alberello Mac Jun 22, 2021 1:01PM ET
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Falling knife.
jonathan seagull
jonathan seagull Jun 22, 2021 1:01PM ET
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U know the spelling but u dont know its meaning.
 
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