Q3 earnings reporting season begins today with the release of earnings of some big U.S. banks. Analysts will scour the results to see if earnings in the sector are beginning to recover. Bank stocks are trading near their lowest level of the year following the collapse of First Republic Bank in May. The KBW Bank Index ($BKX) is down -24% this year, sharply underperforming the +14% gain in the S&P 500 Stock Index ($SPX) (SPY).
Bank stocks face many headwinds, from rising interest rates to increased regulations. There are new regulatory proposals that would impose higher capital requirements on banks. Also, unrealized losses in their securities portfolios and rising bad loan write-offs are undercutting profitability for many banks. Pipe Sandler said, “Investors in the bank space just have a half-dozen issues that are out there that need to get resolved to their better satisfaction.”
Another worry for banks is unrealized losses to their loan portfolios due to the recent jump in the 10-year T-note yield to a 16-year high. Investors may refrain from putting money into bank stocks as the Federal Reserve keeps interest rates higher for longer, which could increase banks’ charge-offs due to borrower distress. Last month, First Horizon Corp said it expects roughly $100 million in aggregate charge-offs for Q3.
Some analysts are concerned that the near-term environment for bank stocks remains unsettled. Wells Fargo said, “The third quarter is not likely to flip a switch from good to bad, but it is likely to affirm an upward progression of loan losses from what’s been unusually favorable levels.” Also, Keefe, Bruyette & Woods said, “There’s a high degree of uncertainty,” and it’s going to take time to get more constructive on bank stocks as the market can’t account for credit weakness until it can get a sense of just how deep it will run.
The results of banks’ Q3 net interest income results will be in focus amid higher deposit costs as firms continue to compete for business following the turmoil sparked by the collapse of regional banks like Silicon Valley Bank in March. Some analysts are looking favorably at bank stocks. Citigroup said bank stocks have become woefully undervalued and are poised for a bounce. Also, UBS said, “Large-cap banks appear materially oversold as they are reflecting what we think are unwarranted existential concerns, rather than the fundamental issues.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
