The banking sector has been under turmoil following the recent failures of high-profile banks. Amid tightened lending standards and the flow of deposits to money market funds, it could be wise to sell fundamentally weak bank stocks, The Bank of Nova Scotia (BNS) and East West Bancorp, Inc. (EWBC), which have been slumping in price.
I have discussed the challenges the banking industry is currently facing.
The recent banking woes caused a lack of confidence in the banking system among depositors. Depositors have been taking their money out of banks and parking it into the high-yield money market funds and established banking names considered too big to fail.
Banks are now facing an uphill task of retaining their customers by raising interest rates on savings accounts. Moreover, tightening lending standards are expected to put further pressure on banks' net interest income.
The former International Monetary Fund chief economist Raghuram Rajan warned that the banking system is headed for more turmoil. Moreover, Goldman Sachs analysts led by chief economist Jan Hatzius wrote, "We expect stress in the banking system to weigh on credit growth, which will, in turn, reduce real GDP growth."
Amid this backdrop, investors who hold the above-mentioned stocks could look to sell before they fall further.
The Bank of Nova Scotia (BNS)
BNS is headquartered in Halifax, Canada, and provides various banking products and services worldwide. It operates in four segments: Canadian Banking, International Banking, Global Wealth Management, and Global Banking and Markets.
In terms of forward non-GAAP P/E, BNS’ 8.84x is 2.1% higher than the industry average of 8.65x. Its forward Price/Sales of 2.43x is 16.8% higher than the industry average of 2.08x. Likewise, its 1.16x forward Price/Book is 19.6% higher than the industry average of 0.97x.
For the fiscal first quarter that ended January 31, 2023, BNS’ adjusted total revenue for the period declined 1% year-over-year to C$7.98 billion ($5.89 billion). Its adjusted net income attributable to common shareholders declined 15.3% year-over-year to C$2.23 billion ($1.64 billion). Additionally, its EPS came in at C$1.85, representing a 14% decline from the year-ago period.
BNS’ EPS and revenue for the quarter ending April 30, 2023, are expected to decline 18.3% and 1.9% year-over-year to $1.39 and $6.08 billion, respectively. Over the past year, the stock has fallen 26.7% to close the last trading session at $50.36.
BNS’ weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, translating to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #86 out of 91 stocks in the Foreign Banks industry. It has a D grade for Sentiment. We have also given BNS grades for Growth, Value, Momentum, Stability, and Quality. Get all BNS ratings here.
East West Bancorp, Inc. (EWBC)
EWBC operates as the bank holding company for East West Bank that provides a range of personal and commercial banking services to businesses and individuals. The company operates through three segments: Consumer and Business Banking, Commercial Banking, and Other.
In terms of forward Price/Sales, EWBC’s 2.91x is 39.9% higher than the 2.08x industry average. Likewise, its 1.09x forward Price/Book is 13.2% higher than the 0.97x industry average.
EWBC’s total deposits for the first quarter ended March 31, 2023, declined 0.4% year-over-year to $54.74 billion. Its net interest income after provision for credit losses declined 0.1% sequentially to $579.86 million. The company’s total noninterest income declined 24.8% year-over-year to $59.98 million.
EWBC’s EPS for fiscal 2024 is expected to decline 5.1% year-over-year to $8.46. Over the past year, the stock has fallen 31.3% to close the last trading session at $54.81.
EWBC’s POWR Ratings reflect its grim outlook. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.
The stock is ranked #85 in the same industry. Additionally, it has a D grade for Sentiment. To see the additional ratings of EWBC for Growth, Value, Momentum, Stability, and Quality, click here.
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BNS shares were trading at $49.92 per share on Monday afternoon, down $0.44 (-0.87%). Year-to-date, BNS has gained 5.11%, versus a 8.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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