Interest rates have soared this year, with the 10-year Treasury yield climbing 157 basis points to 3.08%.
Normally rising rates help bank stocks.
That’s because the interest rates on loans that banks issue and bonds that they buy generally rise faster and by more than the interest rates that banks provide on deposits.
But that’s not benefiting banks this year, because investors are concerned about the possibility of recession.
A recession, of course, would hurt banks. Many experts see a strong possibility of a downturn in the next 12 to 24 months.
“Given the current inflation level of [more than 8%] and unemployment below 4%, historical evidence suggests a very substantial likelihood of recession over the next year or two,” Harvard economist Larry Summers, a former Treasury secretary, and Harvard research fellow Alex Domash, wrote in a blog.
“Since 1955, there has never been a quarter with average inflation above 4% and unemployment below 5% that was not followed by a recession within the next two years.”
This fear of recession has pushed bank stocks down this year, with the KBW Nasdaq Bank stock Index, dropping 18% year to date.
But for long-term investors, now may be the time to buy bank stocks.
Morningstar on JPMorgan
One bank stock that Morningstar analyst Eric Compton likes is JPMorgan Chase (JPM). He assigns it a wide moat and puts fair value at $151. The stock recently traded at $122.27.
In the first quarter, the JPMorgan’s investment banking revenue slid and expenses rose. But the expense increase was only 2% year over year, Compton noted in a commentary.
"Trading fees outperformed, roughly offsetting the miss in investment banking,” he wrote.
“These results fit our expectations,” Compton said, and they led him to trim his fair value estimate by just $1. “We will pull forward some of the bank’s expected net interest income, but this will not change our longer-term view of its through-the-cycle earnings power,” he said.
“We view JPMorgan as a high-quality franchise at a reasonable price, with higher expenses today leading to an even better competitive position tomorrow.”
Morningstar on U.S. Bancorp
Compton also favors U.S. Bancorp (USB), assigning it a wide moat and putting fair value at $60. The stock recently traded at $49.56.
“U.S. Bancorp is one of the strongest and best-run regional banks we cover,” Compton wrote in a commentary.
“Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity.”
"[Its] exposure to moaty non-bank businesses and its consistently excellent core banking operations make us like the company's positioning for the future,” he said.
Bank of America analysts recently cited Wells Fargo (WFC), Morgan Stanley (MS), M&T Bank (MTB), Fifth Third Bancorp (FITB) and East West Bancorp (EWBC) as strong players.
The author of this story owns shares of JPMorgan and U.S. Bancorp.
