Ask the Rational Investor: Banks are Back!

The last two years have been challenging for bank stock investors as they have dramatically underperformed the S&P Financial Sector (-7%) and S&P 500 (-0.2%) compared to many of the largest banks, declining 30-50% over the same period.

Underperformance can be traced back to banks having unrealized losses in their bond portfolios after an unprecedented increase in interest rates. Generally, these losses don’t bother investors as the securities represent extra cash on bank balance sheets and are an alternative to loans.

The canary in the coal mine is a deposit run and we all remember the Silicon Valley Bank fiasco.

These concerns have been discussed quarterly by every publicly traded bank since the banking episode last March and are priced into current valuations of bank stocks.

Over the last few months economic data has more clearly demonstrated that inflation is falling. Inflation is still unlikely to hit the Federal Reserve’s target of 2% in the near term.

Markets are expecting that the Federal Reserve will reduce interest rates soon, which has caused bond prices to increase from recent lows shrinking the unrealized losses in these bond portfolios.

Bank stock performance has followed suit. Over the last two months the S&P Financial sector stocks have rallied 2.6% and many bank stocks have seen prices increase even more with many of them up 4-7%, beating the broader S&P 500’s return of less than 1%.

One bank stock worth consideration is Truist Financial (TFC) with branches throughout the South and mid-Atlantic and is a result of two merged banks SunTrust and BB&T.

A strong footprint combined with the bank’s ability to improve operations post the recent merger should result in long-term value creation for shareholders. The current valuation at 1.4x tangible book value is one of the cheapest valuations over the last decade.

With a current dividend yield of almost 7% the stock market is pricing in concerns about the bank’s financial stability. Fears of unrealized losses and thin capital ratios are legitimate but are likely overstated as the bank has options to raise capital through the full sale of their insurance brokerage business unit.

Investing in individual securities can be risky and not appropriate for every investor. Prior to making any decisions consult with your portfolio manager to determine the suitability for your risk and return objectives.

Sources: Factset, Company Reports

Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms.  The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.