Shares of battered US banks could be boosted this year

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By Sinéad Carew

(More Bank) – After a disappointing year in 2018, large US bank stocks could be relegated in the second half of the year if future earnings releases show that strong fourth-quarter lending growth is offsetting weak earnings from US operations. negotiation.

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

<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The index of the bank S & P 500 <.SPXBK> fell 18.4% in 2018, compared to a 6.2% decline for the entire S & P 500 <.SPX> as investors fled banks fearing a slowdown in economic growth, declining credit, flattening the yield curve and a strong bet, the Federal Reserve would slow interest rate hikes. "data-reactid =" 25 "> The S & P 500 banking index <.SPXBK> fell 18.4% in 2018, compared to a 6.2% decline for the entire S & P 500 <.SPX> as investors fled banks, worried about slowing economic growth, weakening credit, flattening the yield curve, and the Federal Reserve's slowdown in rising interest rates. 39; interest.

While some investors are still wary of the sector, which was at the epicenter of the last economic downturn, others say that sales have been excessive. Lisa Welch, Senior Portfolio Manager of the John Hancock Regional Bank Fund in Boston, was encouraged by the recovery of loan growth data in the fourth quarter and also expects banks to see improved margins net of interest.

"With the valuations at which they are trading, we see banks as an extremely attractive buying opportunity," Welch said. "The actions of the banks were acting as if the US economy was entering a short-term recession." We disagreed.

According to Refinitiv data, S & P 500 banks are currently trading about 9 times the forecast estimates, which is well below the long-term median of 11.6 and the long-term average of 12.7.

"Even with a slightly more cautious view of the economy, that will slow down compared to the growth of 2018, we still think that there is a lot of earnings growth potential," Welch said.

(GRAPHIC: S & P 500 vs Median and Average Banking Rating – https://tmsnrt.rs/2SO1VI5)

Friday, the S & P banking sector was up 0.2%, against a decline of 0.2% for the benchmark. [.N]

<p class = "canvas-atom web-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The fourth quarter business reporting season will begin with the results from Citigroup Inc Monday, January 14, followed by JPMorgan Chase & Co and Wells Fargo & Co the next day. "data-reactid =" 33 "> The fourth quarter business reporting season will begin with the results of Citigroup Inc. Monday, January 14, followed by JPMorgan Chase & Co and Wells Fargo & Co the next day.

Wall Street expects earnings growth of 25.5% in the fourth quarter for S & P 500 banks and 27.4% for 2018, according to Refinitiv's IBES data, which show earnings growth banks by 10.7% in 2019.

According to Jefferies' analysis of Federal Reserve data, borrowing from US banks rose 4.7% year-over-year in the fourth quarter, up from 3.2% the previous year, while commercial and industrial loans grew 9.2% in the fourth quarter quarter of the previous year.

"We'll have to see if it'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 about the group, and the growth of loans and comments will be better than people fear."

Many bank investors are concerned that the cost of bank credit will increase as current economic growth ages and economic growth slows.

The sector has also been shaken by uncertainty over the extent to which the Federal Reserve will further increase interest rates and how its path of growth will affect net interest margins and loan growth. Higher rates tend to increase banks' margins, but they could also dampen loan demand as loans become more expensive.

Aaron Dunn, co-director of Eaton Vance's value stocks in Boston, estimated at less than 50% the likelihood of a "Goldilocks situation" in which the Fed's policy fits banks perfectly.

While Dunn said that bank shares could increase in 2019, some valuations do not seem cheap considering the rising cost of credit.

"You've seen a spike in credit and it's likely that the situation will worsen from now on.I do not say it's going to collapse, but gradually," said Dunn, who favors Citigroup's actions relative to JPMorgan because of their valuation.

"I would not say that we are beating the buyers of the table here in the financial and banking sectors, we are seizing some good opportunities here and there," he said.

(GRAPHIC: Ratings of some of the largest US banks – https://tmsnrt.rs/2SRv718)

(Sinéad Carew report, additional report by Chuck Mikolajczak, Richard Chang edition)