Analysis: U.S. bank stocks are fine, if you are rich in patience

By Sinéad Carew
(Reuters) - The US banking sector has been beaten this year, but investors looking for bargains there may need patience as banks are particularly sensitive to low interest rates, the uneven economic recovery and the muddy economic outlook.
The S&P 500 Bank subsector, which starts its third quarter earnings season on October 13, last fell 33.7% year-to-date, compared with a 5.8% increase for the S&P 500 Index.
Banks put such a drag on the broader S&P financial index that the year-to-date decline of 19% ranks second among the top S&P 11 sectors after the 49.9% decline in energy.
If Washington lawmakers can come to an agreement, a new stimulus package could help banks in boosting US credit growth, interest rates and economic activity.
And the banking index is up 12% from its intraday low on September 2nd to a high on October 6th as longer-term US Treasury bond yields rose with positive hopes as banks benefit from higher interest rates.
However, investors are not convinced the recent gains will be sustainable as the Federal Reserve has announced plans to keep overnight rates low for the foreseeable future to support an economic recovery that is likely to take years.
"They expect years of full recovery in this sector. It will take a lot of positive things in the US economy to get back to the performance we see in the broader S&P," said Rick Meckler, partner at Cherry Lane Investments, a family investment firm based in New Vernon, New Jersey. "I think investors need to be patient."
Banks outperformed the market on Thursday on renewed hopes for a stimulus package after US President Donald Trump said without giving details that there was a good chance of a deal.
However, as of Thursday afternoon, there was no agreement despite the fact that the US House of Representatives Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin wanted to continue talks.
According to Meckler, another incentive would be "a good first step towards a better environment for (banks) to generate sales and profit growth".
However, he does not see the incentive as a panacea to deeply transform the low interest rates, low borrowing, and weak credit that have plagued the sector.
Money manager Villere & Co was attracted by low valuations of bank stocks like First Hawaiian Inc (up 44% year-to-date) and Kearny Financial Corp (up 41% so far) in 2020.
According to Lamar Villere, co-portfolio manager, these banks are small enough to assess their risks more easily than the exposures of geographically more diverse and larger banks such as JPMorgan Chase & Co or Wells Fargo & Co.
But even this cautious strategy is only suitable for those who "can wait long term," said Villere, who expects weaker results from the sector in the short and medium term.
"What is branded in are some pretty terrible numbers," he said.
JPMorgan and Citigroup Inc will kick off third-quarter earnings season on October 13, followed by Wells Fargo and Goldman Sachs, and Bank of America Corp. the next day.
On average, Refinitiv estimates that the S&P 500 banking sector will experience a 31% decline in earnings and a 6.7% decline in sales in the third quarter.
According to Refinitiv, the majority of the major US banks managed to beat very low earnings per share and revenue expectations for the second quarter.
Right now, John Augustine, chief investment officer at Huntington National Bank in Columbus, Ohio, is staying out of the sector and leading poor net interest margins.
"Banks have to deliver this quarter," said Augustine.

(Graphic: Banks are falling behind the broader market - https://fingfx.thomsonreuters.com/gfx/mkt/nmovawernva/banksvssandp.PNG)



(Reporting by Sinéad Carew; Additional reporting by David Henry; Editing by Lisa Shumaker and Alden Bentley)

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