A vengeful market is laying waste to regional bank stocks. Should bold investors look for names to buy?
Not quite yet.
No one wants to buy bank stocks ahead of a recession, said UBS analyst Erika Najarian. But given the week’s pricing action, she sees some long-only investors as well as hedge funds dipping in their toes.
Valuations seem to be discounting a potential recession and the industry’s long-term changes, she said. Large-cap banks are trading between 1.2 and 1.3 times their tangible book value, including the noncash impact of bond portfolio losses. Back out those items, and the stocks are close to one-times book, a level that has traditionally attracted buyers.
Bearish rhetoric around the industry has distracted investors from the qualities of big banks like
Bank of America
(ticker: BAC), said Najarian. While it’s now down near book value, BofA has a strong base of small depositors, more retail than commercial business, and solid levels of capital. At a time when investors worry about flighty deposits, BofA is attractively boring.
Another bank whose share price has fallen to silly levels, said the UBS analyst, was
Citizens Financial Group
(CFG). The Rhode Island-based regional bank has robust levels of regulatory capital, yet it trades at six times next year’s earnings and under 0.9 times tangible book (including noncash accruals).
When the banks see the other side of the current storm, Najarian thinks their stocks will trade at 10 times earnings and 1.5 times tangible book.
It’s been a “brutal” year for Dave Ellison, who manages two bank-stock mutual funds at Hennessy Funds.
Banks have been battered by rising short-term rates, commercial real estate worries and tepid demand for loans, he noted. The industry has dealt with those issues before, but now it’s also dealing with the novel afflictions of deposit flight at the speed of light and panic-sowing social media.
“I’m just trying to stay out of the way,” said Ellison. “This is a time to be paying attention and looking for stocks that are beaten down. But that doesn’t mean it’s time to buy.”
Ellison has maintained his holdings of favorite names like Citizens Financial, but said he can’t be sure what will be in his portfolio if the turmoil continues storming through regional bank stocks. “I can’t be wed to anything right now,” he said.
The problem of evaporating deposits is harder to model than traditional loan book issues, said Abbott Cooper, who runs the activist bank investment firm Driver Management.
“The risks in some of these bank stocks can’t really be quantified,” Abbott said. “It takes a really strong stomach to wade into these waters.”
That said, he likes banks with balanced businesses that aren’t dependent on a particular product or industry group. Among the small but solid banks in his portfolio are Oklahoma City’s
BancFirst
(BANF), Reno-based
Plumas Bancorp
(PLBC), and
Codorus Valley Bancorp
(CVLY), a York, PA-lender that settled a proxy fight with Cooper’s firm last year.
“Whatever we’re going through now is going to abate at some point,” Cooper said. “It can’t be soon enough.”
Write to Bill Alpert at [email protected]
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