US banks underperformed significantly in November 2021, the second consecutive month of underperformance despite strong 3Q21 earnings season and higher rate expectations.
EXECUTIVE SUMMARY
US banks underperformed significantly in November 2021, the second consecutive month of underperformance despite strong 3Q21 earnings season and higher rate expectations.Thus, BKX index decreased by 5.5% MoM vs -0.1% MoM of SPX index, the first month of decline in absolute terms over the last four. Absolute November performance was -0.9 std from the mean monthly performance and it is in the bottom 15% since the index inception. In turn, relative November performance was -4.7% MoM. It is -1.0 std from the mean monthly performance and it is in the bottom 11% of relative performance vs SPX since the index inception. Despite clearly weak performance in November, banks outperformed SPX in 7 out of 11 months of the current year. So, the performance of the first 11 months of the year is the strongest one over the last 24 years while relative performance is the strongest one over the last 5 years.
US banks dynamics were mixed again in November. Thus, the most asset-sensitive banks were among the outperformers but only 3 out of 23 banks from our sample managed to end the month in the green. On the other hand, the largest US financial institutions were among the key laggards with the decline of key underperformers of 7% MoM or more.
Banking revenue trends in the US were mixed so far in 4Q21 with the ongoing acceleration of the loan growth, relatively flat NIM as the short end remained roughly unchanged, multidirectional fee lines, higher opex, and normalizing LLPs. On the other hand, underlying trends continued improving with noticeably higher rate expectations, further improvement of the dynamics of the loan portfolio, and still strong credit quality given ongoing relatively fast economic recovery. So, estimates continued going up. Thus, 4Q21 EPS estimates were revised up by 0.1% MoM in November, or +2.0% qtd. FY21 EPS increased by 0.3% MoM, or +3.3% qtd. In turn, FY22 EPS estimates added +0.2% MoM, or +1.1% qtd. FY21 Revenue projections were also almost unchanged MoM, but +0.8% qtd. On the other hand, banks are still trading with a significant discount to S&P 500 but it is no more trading with a substantial discount to historical averages. Thus, banks are trading at -1.1/-1.0 std on P/E CY but at +0.6/+0.8 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 November 26, 2021). As for relative to S&P 500, banks are currently trading at -1.7 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 at +0.8 std from the sample mean (2010-current moment) and at +2.7 std vs SPX, but it should be noted that SPX’s ROE is currently +3.0 std, while BKX’s ROE is +2.0 std. So, even taking into account the significant outperformance of banks in 2021, the rally may well continue in coming quarters after a short pause recently given the ongoing improvement of banking fundamentals.
EU banks tumbled on an absolute basis in November 2021, after three consecutive months of strong growth. They underperformed the broad market either, the first month of weaker dynamics over the last four. Thus, on an absolute basis, SX7P decreased by 7.9% MoM in November, or -1.2 std from the mean, and it is the bottom 11% of the absolute monthly performance of SX7P index. Relative monthly performance was -5.4% MoM, or -1.4 std, and it is in the bottom 8% of relative monthly performance in SX7P index history. Despite a significant decline in November, it was very strong price performance in the first eleven months of the year, +26.3% ytd, after clearly weak dynamics in three previous years. However, SX7P index underperformed in each of last 3 years and it is still 25.7% lower than it was at the end of 2017, underperforming STOXX 600 index by 37.5% over this period.
The key EU underperformers tumbled by 15% MoM or more in November, while BBVA lost a quarter of its market cap because of Turkey's exposure. Just 4 out of 37 banks from our sample managed to end the month in the green.
European banks reported markedly better results in 3Q21 as they did in four previous quarters after clearly weak figures in 1Q20. Both revenue and net income demonstrated positive surprises. Thus, 32 out of 33 banks from SX7P index for which estimates were available reported better revenue figures in 3Q21 vs 27 out of 32 in 2Q21. Net income was also better than expected for 31 out of 33 banks vs 23 out of 30 in 2Q21. The key driver of better results was lower provisions due to faster economic recovery and ongoing revenue momentum. Even NII/NIM figures weren’t weak for the second consecutive quarter despite rates environment remained challenging, but gradually improving. So, NII prospects for coming years improved meaningfully in recent months due to accelerated inflation and the more hawkish ECB. Hence, earnings momentum continues getting better after significant worsening in 1H20. Thus, median operating profit growth of SX7P index members was +31% in 3Q21 vs +45% in 2Q21 or +37% yoy in 1Q21. Median growth of revenue was 6.5% yoy in 3Q21 (even +5.6% vs 3Q19), the third quarter in a row of positive yoy growth, following negative dynamics over four consecutive quarters. In turn, median revenue surprise was +3.1%, markedly better than median quarterly surprise over the last 10 years of +1.2%. Revenue growth was broad-based with the first yoy growth of NII over the last 6 quarters and +9% yoy growth of non-II for the third quarter in a row. Despite better earnings season, acceleration of the recovery, and higher rate expectations, market perception of the results was restrained. Thus, median 1-day performance of SX7P index members around the earnings date was +0.5% vs 10yr average of +0.2% and 2Q21 figure of +1.1%. On the other hand, overall performance since the start of the earnings season was clearly negative with the decline of SX7P index of 8.4% (from October 15, 2021 till the end of November 2021), while STOXX 600 index decreased by 1.4% over the same period.
Median growth of EU banks’ net income was 45% yoy in 3Q21 after growth of 114% yoy in 2Q21, the third consecutive quarter of yoy growth after 4 quarters in a row of decline. Moreover, 3Q21 net income was even 14% higher than 3Q19 one due to significant reserve releases and better revenue dynamics. Thus, provisions decreased by 62% yoy and provisions were negative for 11 members of SX7P index out of 38 (vs 12 banks in 2Q21). Notwithstanding, consensus forecasts still imply that FY22 NI will be lower by 22% vs FY19 NI. Median ROE of EU banks markedly increased on qoq basis in 3Q21 but it still remains lower than it was in 2019. Thus, median ROE increased by 72 bps qoq, or +283 bps yoy, to 7.7% in 3Q21. Due to positive EPS surprises and improved economic expectations, estimates have increased meaningfully in recent months. Thus, median growth of FY21 NI was +54% ytd (but flat vs the beginning of 2020), implying growth of 31% yoy. As of FY22 NI estimates, median growth was +15% ytd (but -2.5% since the beginning of 2020), implying flat dynamics on yoy basis. On the other hand, revenue estimates added 4.8% ytd for FY21 revenue but still -2.5% since the beginning of 2020.
Despite improving earnings momentum as a result of the faster economic recovery, higher rate expectations and stronger earnings season, the dynamics of the banking stocks in the EU wasn’t very strong in the past months. Risks for EU economies have increased recently due to higher inflation and new lockdowns because of relatively fast delta variant spreading. But banks are a good hedge against inflation in general, and EU financial institutions still don’t look expensive, especially taking into account ongoing growth of revenue/EPS estimates for 2022/2023 years. Thus, a discount to historical averages is 8.0% (-0.5 std at the moment from mean P/E NY of SX7P index members, sample from 2010 to the present), but a discount to US peers (on median P/E NY of BKX index vs SX7P index) is 34% as of November 26, 2021 vs the average since 2010 of 21%, or -1.5 std. So, we anticipate that the growth of EU banks should resume in the near future, but we no more expect their substantial outperformance vs the broad market until the ECB starts the hiking cycle. The worst in terms of operational results is in the past but it is a bumpy road ahead, and we remain neutral on EU banks.
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