US banks outperformed the broad market significantly in January 2022 despite to not very strong absolute performance, after three consecutive months of underperformance. BKX index increased by 2.1% MoM vs -5.3% MoM of SPX index, the 5th month of growth in absolute terms over last 6 months.
EXECUTIVE SUMMARY
US banks outperformed the broad market significantly in January 2022 despite to not very strong absolute performance, after three consecutive months of underperformance. BKX index increased by 2.1% MoM vs -5.3% MoM of SPX index, the 5th month of growth in absolute terms over last 6 months.Absolute January performance was +0.2 std from the mean monthly performance and it is in the top 44% since the index inception. In turn, relative January performance was +7.8% MoM. It is +1.6 std from the mean monthly performance and it is in the top 5% of relative performance vs SPX index since the index inception. It was the strongest month on a relative basis over the last 11 months and it was the strongest start of the year over the last 3 years. Nonetheless, banks’ dynamics weren’t strong in two recent weeks, after the earnings season started.
US banks' dynamics were quite mixed in January 2022, driven by the earnings season and the market sell-off because of the rate expectations growth. So, banks with better earnings in 4Q21 outperformed and managed to end the month in the green. On the other hand, high-growth banks, such as FRC and SIVB, were the key laggards.
US banks reported mixed 4Q21 results, though both reported revenue and EPS figures were noticeably better, for the 7th consecutive quarter. The key driver of profit beat was again reserve releases, for the 5th quarter in a row. On the other hand, OpEx missed and median exceeding of actual OpEx vs the estimates was +5%. Nonetheless, loan growth was quite strong due to significant acceleration of C&I loans growth, while NII was slightly higher than expected despite NIM miss, mainly driven by liquidity deployment. Given the very hawkish Fed and the expected first rate hike already in March 2022, it is quite possible that NIM will turn from the headwind into a tailwind in the nearest future. Also, fee income was better than expected even despite to weakness in trading revenues and a substantial decline in mortgage income. And although the process of releasing the reserves has come to an end which will lead to weaker EPS figures on yoy basis in coming quarters, we see a room for further EPS growth in 2023 and 2024 years, given much higher rate expectations and substantial acceleration of the loan growth. So, even despite to the significant outperformance of banks in 2021, especially taking into account the recent correction, we believe that the rally may well continue in 2022, given the fact that banks are still noticeably undervalued vs S&P 500.
Banks beat expectations markedly in 4Q21 with better EPS figure for 19 out of 24 banks in our group vs 21 positive surprises in 3Q21 and better results for 23 banks in 2Q21, compared with a median number of positive quarterly EPS surprises over the last 60 quarters of 18. Median EPS surprise for our group of banks was +5.2% vs a median quarterly figure over the last 14 years of 4.1%, but the beats in the first three quarters of the year were much stronger, varying from 14% in 3Q21 to 41% in 1Q21 (4Q21 median beat was the weakest one over the last 7 quarters). Revenue surprise was positive again, +1.1%, in-line with a median quarterly figure over last 15 years. Just 16 companies of our group of banks, or 67%, demonstrated positive surprises on revenue, only a little higher than a median quarterly figure since Q1 2007. Unsurprisingly, market perception of the results was negative with the noticeably higher decline of banks vs SPX in the first two weeks after the earnings season started. Moreover, a median percent change in price around the earnings date for our group of banks was -2.6%, the first decline over the last three quarters and the worst performance in our data set from 1Q07, median is -0.3%. BKX index decreased by 8.5% since the start of the earnings season till the end of January 2022, while S&P 500 index lost 3.1%. Nonetheless, consensus estimates dynamics were mixed as higher NII forecasts were offset by the growth of OpEx projections. Thus, 1Q22 EPS estimates were revised down by 0.8% since January 13, 2022 till the end of the month (a median of BKX index members) and it is -1.4% ytd, FY22 EPS estimates were -0.6% since the start of the earnings season, or +0.7% ytd (+5% since the end of 2Q21), while a median change of FY23 EPS estimates was +0.5% since January 13, 2022, or +2.5% ytd (+8.2% since the end of 2Q21). In turn, median revenue FY22 growth was +1.1%, or +1.5% ytd, respectively.
Overall, fundamentals of US banks remain quite strong and will continue improving in the coming years. Due to reserve releases, ROE/ROA figures increased significantly in recent quarters, remaining near the multi-year highs. Thus, ROE increased by 7 bps yoy to 11.2% in 4Q21, +27 bps vs 4Q19, but -81 bps qoq. Key credit metrics of US banks still remained pretty resilient due to significant acceleration of the recovery and strong health of both US consumer and corporate sectors. We no more expect any significant deterioration of the credit quality in the near future even after the expiration of various supporting programs. On the other hand, we also don’t see a room for further reserve releasing, even despite some banks do not exclude that this process may continue. So, it means that ROE/ROA should drop slightly from the current levels in coming quarters, but we expect that they will start to improve in 2H22 and it is quite probable that it will continue exceeding their pre-pandemic levels in the nearest 2-3 years. Nonetheless, banks are still trading with a noticeable discount to S&P 500, but roughly in-line with historical averages. Thus, banks are trading at 0.0/+0.1 std on P/E CY and at -0.4/-0.1 std on P/E NY (on the basis of samples from 2000 and 2010 years to the current moment) relative to historical averages (as of January 28, 2022). As for relative to S&P 500, banks are currently trading at -0.8 std and -1.1 std from the sample mean (2010-current moment) for P/E CY and P/E NY, respectively. On P/B, banks are trading with +1.3 std from the sample mean (2010-current moment) vs SPX with +2.2 std.
EU banks increased substantially on both an absolute basis and a relative basis in January 2022. It was the second consecutive month of their significant growth in absolute terms after a meaningful drop in November 2021. On a relative basis, it was the strongest period over the last 11 months. Thus, on an absolute basis, SX7P increased by 7.4% MoM in January 2022, or +1.0 std from the mean, and it is the top 10% of absolute monthly performance of SX7P index. On the other hand, relative monthly performance was +11.7% MoM, or +3.1 std, and it was the 4th best month of relative monthly performance in SX7P index history. EU banks continue outperforming the broad market after clearly strong 2021 year when they added 34% (+9.6% on relative basis). On the other hand, SX7P index underperformed in each of 2018-2020 years. So, it is still 15.4% lower than it was at the end of 2017, underperforming STOXX 600 index by 29.7% over this period.
The key EU outperformers increased by 15% MoM or more. In turn, the key EU underperformers, which ended January 2022 in the red zone, were banks with weaker 4Q21 results and lower asset-sensitivity.
Due to a strong start of the earnings season, noticeably higher rate expectations and much steeper the yield curve, EU banks resumed outperforming the broad market after three months of flat or weaker dynamics. Uncertainty related to Omicron spreading poses some risks to the economic recovery in the near term, but mid-term drivers for EU banks remain intact, from our point of view. Moreover, SX7P NII has already returned to growth on yoy basis. Excess capital of EU banks remains quite high and the total average yield of SX7P index members could exceed 8% annually in some next years. Inflation pressure will inevitably lead to a wage growth, but we expect that operating leverage will remain positive. In any case, banks are a good hedge against inflation. On the other hand, EU banks are no longer traded with a deep discount to their historical averages, while a discount to US peers is just insignificantly higher than historical averages. Thus, the discount to historical averages is already narrowed to just 6% (-0.4 std), but the discount to US peers is 25% as of January 28, 2022 vs the average from 2010 of 21%, -0.4 std. So, we still remain positive on European banks but prefer US peers.
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