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JPMORGAN CHASE & CO.

(JPM)
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Battered U.S. bank stocks may get a boost this year

01/11/2019 | 03:22pm EDT
FILE PHOTO:  Traders work on the floor of the NYSE in New York

(Reuters) - After a miserable 2018, big U.S. bank stocks could be in for a lift if upcoming earnings releases show strong fourth-quarter loan growth helps to offset weak trading revenue.

By Sinéad Carew

And some bargain hunters are also betting on stronger 2019 growth than current valuations imply.

The S&P 500 bank index <.SPXBK> fell 18.4 percent in 2018 compared with a 6.2 percent drop for the broader S&P 500 as investors fled banks on concerns about slowing economic growth, weakening credit, a flattening yield curve and bets the Federal Reserve would slow down interest rate hikes.

While some investors are still wary of the sector, which was at the epicenter of the last economic downturn, others say the sell-off went too far. Lisa Welch, lead portfolio manager for the John Hancock Regional Bank Fund in Boston, was encouraged by a pickup in loan growth data in the fourth quarter and also expects banks to report improving net interest margins.

"With the valuations they're trading at, we see banks as an extremely attractive buying opportunity," said Welch. "Bank stocks were acting like the economy in the U.S. was going into a near term recession. We disagreed."

S&P 500 banks currently trade around 9 times forward estimates, well below the long-term median of 11.6 and the long-term average of 12.7, according to data from Refinitiv.

"Even with a little more cautious view on the economy, that's going to slow from the growth we had in 2018, we still think there's a lot of earnings growth potential," said Welch.

(GRAPHIC: S
&P 500 Bank Valuation vs median and average - https://tmsnrt.rs/2SO1VI5

On Friday the S&P bank sector was up 0.2 percent compared with a 0.2 percent decline for the benchmark index. [.N]

The fourth-quarter corporate reporting season will kick off with results from Citigroup Inc on Monday, Jan. 14, followed by JPMorgan Chase & Co and Wells Fargo the next day.

Wall Street expects 25.5 percent fourth-quarter earnings growth for S&P 500 banks and 27.4 percent for 2018, according to IBES data from Refinitiv which show bank earnings growing at 10.7 percent in 2019.

According to Jefferies analysis of Federal Reserve data, U.S. bank loans grew 4.7 percent year-over-year in the fourth quarter compared with 3.2 percent a year ago, while commercial and industrial loans grew 9.2 percent in the fourth quarter compared with 2.6 percent in the year-ago quarter.

"We'll have to see if that's sustainable but at least that's a better story for the fourth quarter," said Kush Goel, senior research analyst at Neuberger Berman in New York. "People have become too pessimistic on the group. Loan growth and commentary will be better than people fear."

Many bank investors have worried that bank credit costs will rise as the current economic expansion ages and as economic growth slows.

The sector has also been crushed by uncertainty about how much further the Federal Reserve will raise interest rates and how its hiking path will affect net interest margins and loan growth. While higher rates tend to boost bank margins, they could also stunt loan demand as borrowing gets more expensive.

Aaron Dunn, co-director of value equity for Eaton Vance in Boston, estimated a less than 50 percent chance of a "Goldilocks situation" where Fed policy is just right for banks.

While Dunn said bank stocks could rise in 2019, some valuations do not look cheap when rising credit costs are taken into account.

"You've seen the peak in great credit and it's probably likely to get worse from here. I'm not saying its going to fall apart, just incrementally," said Dunn who favors Citigroup shares over JPMorgan due to their valuations.

"I wouldn't say we're pounding the table buyers here in financials and banks. We're picking up a couple of good opportunities here and there," he said.

(GRAPHI
C: Valuations of some of the biggest U.S. banks - https://tmsnrt.rs/2SRv718

(Reporting by Sinéad Carew; Additional reporting by Chuck Mikolajczak; Editing by Richard Chang)

By Sinéad Carew


ę Reuters 2019
Stocks mentioned in the article
ChangeLast1st jan.
BYD COMPANY LIMITED -4.14% 217.8 End-of-day quote.7.19%
CITIGROUP INC. 0.94% 67.3 Delayed Quote.8.19%
DEERE & COMPANY 0.05% 354.72 Delayed Quote.31.83%
DJ INDUSTRIAL 0.03% 35066.48 Delayed Quote.14.56%
EATON CORPORATION PLC -0.42% 156.06 Delayed Quote.30.46%
JPMORGAN CHASE & CO. 0.50% 151.35 Delayed Quote.18.55%
JUST GROUP PLC -0.41% 96.6 Delayed Quote.38.77%
MORGAN STANLEY 1.71% 96.12 Delayed Quote.37.97%
NASDAQ 100 -0.09% 15097.056543 Delayed Quote.17.25%
NASDAQ COMP. -0.14% 14812.837994 Delayed Quote.15.12%
S&P 500 0.04% 4412.98 Delayed Quote.17.46%
THE GOLDMAN SACHS GROUP, INC. 0.43% 375.345 Delayed Quote.41.84%
THE LEAD CO., INC. -1.36% 653 End-of-day quote.-22.26%
WELLS FARGO & COMPANY 0.52% 44.76 Delayed Quote.47.75%
WILL GROUP, INC. 1.03% 981 End-of-day quote.-2.49%
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Financials (USD)
Sales 2021 122 B - -
Net income 2021 41 919 M - -
Net Debt 2021 - - -
P/E ratio 2021 10,8x
Yield 2021 2,52%
Capitalization 450 B 450 B -
Capi. / Sales 2021 3,70x
Capi. / Sales 2022 3,71x
Nbr of Employees 260 110
Free-Float 72,7%
Chart JPMORGAN CHASE & CO.
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JPMorgan Chase & Co. Technical Analysis Chart | JPM | US46625H1005 | MarketScreener
Technical analysis trends JPMORGAN CHASE & CO.
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Income Statement Evolution
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Mean consensus OUTPERFORM
Number of Analysts 29
Last Close Price 150,64 $
Average target price 164,40 $
Spread / Average Target 9,13%
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Managers and Directors
James Dimon Chairman & Chief Executive Officer
Gordon A. Smith Co-President & Co-Chief Operating Officer
Daniel E. Pinto Co-President & Co-Chief Operating Officer
Jeremy Barnum Chief Financial Officer
Lori A. Beer Chief Information Officer
Sector and Competitors