When interest rates rise, bank stocks generally do, too. That’s because interest rates on the loans they issue and the bonds they buy generally rise faster and by more than the interest rates they offer on deposits.
Now, of course, there’s a complicating factor: the possibility of recession. Many economists see a good chance the economy will turn down in the next 12 to 24 months, thanks in part to the Federal Reserve’s program to raise interest rates.
Recessions are bad for bank stocks. And the KBW Nasdaq Bank stock Index has slid 17% so far this year.
But Bank of America analysts say the recession concern may be overblown. “While bank stocks are trading on recession concerns, ... the potential for a less dire macro outlook exists on the back of easing inflationary pressures,” they wrote in a commentary.
Benign Fed Outlook
The worst of the Fed tightening may soon be in the rear-view mirror, they said. A potential deescalation of the war in Ukraine also could help the economy. The war has sent commodity prices soaring and worsened supply-chain turmoil.
“Increased confidence that the U.S. economy can withstand the impact of Fed rate hikes without entering a recession should cause investors to revisit" the bank group, the analysts said.
With forward price-to-earnings multiples of 8 to 9, bank stocks “offer a compelling risk/reward, assuming that the Fed engineers a soft landing,” they said.
In particular, Bank of America analysts cite Wells Fargo (WFC), Morgan Stanley (MS), M&T Bank (MTB), Fifth Third Bancorp (FITB) and East West Bancorp (EWBC). The B of A analysts rate them all as buy.
Morningstar Analyst Views
When it comes to Wells Fargo, Morningstar analyst Eric Compton assigns it a wide moat. He cut his fair-value estimate by $4 a share to $58 after the bank reported its first-quarter earnings. That’s still 30% above the recent level of $44.47.
As for the earnings, “the main disappointment was fees, which came in below our expectations, and the outlook was not positive either,” Compton wrote in a commentary.
“Mortgage and investment banking fees fell off harder than we had hoped, and wealth-management-related fees dropped compared to last quarter, whereas we were hoping for continued growth.”
Looking at Morgan Stanley, Morningstar analyst Michael Wong assigns it a narrow moat and puts fair value at $95. The stock recently traded at $83.90.
“Morgan Stanley reported revenue and earnings for the first quarter that were comparable to recent quarters, but we believe that results may look a bit more volatile like peers over the next several quarters,” he wrote in a commentary.
