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Big Bank Stocks Bounce Back

3 June 2015 in Trading Ideas

After what could charitably be described as a sluggish start to 2015, the stocks of the country’s largest banks have finally started to show signs of life.

Over the past five weeks, the Too Big to Fail motif has gained 3.8%. During that same time period, the S&P 500 has increased 0.4%.

In the last 12 months, the motif has risen 13.7%; the S&P 500 is up 12%.

According to an article last week in The Wall Street Journal, investors are pointing to several factors for the run-up in bank stocks.1

For starters, many traders are growing more confident that US growth will pick up in the second half of the year following a soft start to 2015, boosting long-term interest rates. (It’s worth pointing out the Journal article preceded the government’s updated lower first-quarter GDP figures).

Stronger growth and rising rates would boost earnings by allowing banks to widen the spread between the interest they charge on loans and what they pay for deposits, the Journal said.

Other portfolio managers say that even without a rate increase, valuations on banks are low, given improving loan growth and rosy credit trends. Banks have also largely put behind them a series of large penalties and legal troubles over mortgage securities, interest-rate rigging and other issues.

According to the Journal, that makes them even more compelling at a time when major US stock indexes are trading at levels, in relation to their earnings, that have been rarely seen in recent years.

“Domestically focused bigger banks are one of the few areas that are still cheap in the marketplace, David Chalupnik, head of equities for Nuveen Asset Management, told the Journal.

Of course, this wouldn’t be the first time investors have jumped into bank stocks expecting rates to increase and the sector’s shares to follow, winding up largely disappointed. Banks also have been hoping for increases in Fed interest rates for several years, the Journal said.

While Bank of America shares have more than tripled from their 2008 lows, for example, they remain about 70% below their pre-financial-crisis highs.

So far in 2015, financial companies in the S&P 500 are up just 0.2%, the third-worst-performing group after energy and utilities companies, according to the Journal.

But many investors say the low prices on bank shares justify the risk. Some large banks “represent value in the truest sense of the word and should start to perform better as we get to the start of raising interest rates,” Jeremy Zirin, head of investment strategy at UBS Wealth Management Americas, told the Journal.

Value is no small thing, it seems, as the Journal posited that the revived appetite for bank stocks is part of a broader rekindling of demand for value stocks. In the past several years, funds investing in growth stocks have outperformed those investing in value stocks amid uneven US growth. Among the biggest gainers have been technology and health-care companies, which have contributed outsize gains to many growth-stock indexes.

But analysts and traders say that trend is fading, the Journal said. Value stocks tend to rise faster than growth stocks during periods of stronger growth more broadly, in part reflecting the higher premium investors pay for the steadier earnings and substantial dividends of value stocks as interest rates rise.

If sustained US economic growth lay ahead, that investors are hoping that could also lead to a sustained rally for investments in bank stocks.

1Corrie Driebusch, “US Bank Shares Regain Popularity,” wsj.com, May 25, 2015.