US banks outperformed the broad market significantly in July 2024, for the first time over the last three months. Nonetheless, it was just the 8th time of outperformance over the last 18 months. Also, the banks ended July in the green after a slight decline in June, and it was the 6th time of growth over the last 9 months.
EXECUTIVE SUMMARY
US banks outperformed the broad market significantly in July 2024, for the first time over the last three months. Nonetheless, it was just the 8th time of outperformance over the last 18 months. Also, the banks ended July in the green after a slight decline in June, and it was the 6th time of growth over the last 9 months. Thus, BKX index soared by 9.6% MoM in July vs +1.1% MoM of SPX index. Absolute July 2024 performance was +1.3 std from the mean monthly performance, and it was in the top 8% of absolute monthly performance in the index history. Relative July 2024 performance was +8.4% MoM. It is +1.7 std from the mean monthly performance, and it is in the top 4% of relative performance vs SPX index since the inception of BKX index. July was the best month on a relative basis over the last 41 months. So, BKX index has been already outperforming the broad market ytd, +3.1% or +0.4 std. If the situation doesn’t change in 2H24, 2024 will be the first year of outperformance of BKX index over the last three years. All banks from our sample except for WFC ended July in the green. Thus, WAL and EWBC, the best performers in July, skyrocketed by 28.1% MoM and 20.0% MoM, respectively, driven by better 2Q24 earnings as well as a notable decline of interest rate expectations. In turn, LC banks were among the worst performers. A difference of monthly price changes between the best and the worst performers of our sample of banks was 28.2% in July vs just 8.9% in June. But June was the least volatile month for US banks over the last 70 months. In turn, 1Q24 was the most volatile start of the year since GFC. Nonetheless, correlation between price changes yoy and EPS FY24E changes yoy increased notably MoM in July, still remaining quite high, staying at 81% as of the end of the month.
US banks continue trading with a discount both to historical averages and to S&P500 index, given quite weak performance of US financial institutions on absolute and relative bases in two recent years, even despite a noticeable decline of profit and revenue estimates. However, the discount narrowed considerably in July after roughly flat but volatile 1H24. Thus, median P/E 24E of our group of banks increased from 10.9x (as of June 28, 2024) to 11.7x (as of July 31, 2024). In turn, median P/E 25E went up from 9.4x to 10.6x for the same period of time. Hence, banks are still trading at just -0.4/-0.3 std on P/E CY and at -0.5/-0.2 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 July 31, 2024). As for their performance relative to S&P500, the banks are currently trading at -1.2 std and -1.1 std from the sample mean (2010-current moment) for P/E CY and P/E NY, respectively Median P/B of our group of banks was roughly flat in 2Q24, hovering around 1.17x. However, the ratio increased notably during the last month, from 1.17x (as of June 28, 2024) to 1.29x as of the end of July. So, on P/B, banks are trading already at +0.4 std from the sample mean (2010-current moment) vs SPX with +2.2 std, despite current adj. ROE premium to historical averages are roughly the same for both BKX and SPX indexes. As for individual names, multipliers are still quite different. But dispersion across banks (excluding NYCB) decreased notably ytd. Nonetheless, OZK’s P/E estimates for the nearest years are around 6-8x while CFR’s ratios are 13-14x at the moment.
Strong 2Q24 GDP beat shouldn’t be misleading. Thus, GDP growth accelerated to 2.8% in 2Q24 vs just +1.4% in 1Q24 and the consensus estimate of 2.0%. On the other hand, the main driver of acceleration was a notable growth of private inventory investments while the key core driver of GDP growth, namely consumer spending, was roughly flat in 2Q24 vs 1Q24. Moreover, faster than expected GDP growth may be an additional argument for the Fed to hold the rate longer than expected, especially in case of weaker disinflation process. In any case, we still expect inevitable deceleration of GDP growth rates in the near quarters, given gradual cooling of the labor market as well as higher for longer interest rates, even despite notable decline of the rate expectations in two recent months. Moreover, despite both hard and soft data ytd imply that the economic growth still remains solid and even higher than expected, at least so far, the most recent data points to growing imbalances in the US economy. Unsurprisingly, FOMC economic projections revealed at the June meeting were slightly weaker vs March forecasts. Nonetheless, the Fed continues to worry more about inflation risks, reiterating again that there was no rush for the Fed to start the easing cycle as soon as possible. Even if we see the first rate cut in September, the chances of the event have increased significantly, the rate pressure will remain quite high in the near future, especially in the most vulnerable industries/segments. Thus, despite a decline of rate expectations in June and July, it is still implied less than three rate cuts till the end of the year while FF rate is expected to remain above 3.5% at least till the end of 2026.
The 2Q24 earnings season was notably better than expected but with mixed outlooks. It was slightly distorted by one-timers but core fundamentals were roughly in line with expectations. So, EPS estimates have already resumed their growth in recent months after a soft start of the year. Thus, 25 out of 30 banks from our sample reported better than expected EPS. A median surprise was +5.4% vs +3.9% in 1Q24. Revenue of 23 out of 30 banks from our sample exceeded estimates in 2Q24 with a median surprise of +0.9% vs +0.1% in 1Q24. The main drivers of better EPS figures were higher revenues (both NII and fees) as well as lower provisions despite all credit quality fears. NII exceeded estimates even despite NIM miss. Thus, just 11 out of 28 banks from our sample for which estimates were available beat NIM estimates in 2Q24 with a median miss of 1.5 bps. In turn, 2/3 of the sample exceeded NII estimates with a median beat of 1%. A number of banks lowered FY NII outlooks again but it didn’t change our view that majority banks from our sample have already reached NIM’s trough of the current cycle, especially after a notable decline of the rate expectations in recent months. Thus, median NIM of our sample decreased just by 1 bps qoq in 2Q24. Nonetheless, it should be noted that 3Q23 NIM estimates were revised down slightly qtd. In turn, FY25 NII estimates moved up both ytd and qtd. Loan growth remains relatively weak but it has accelerated recently. According to the Fed H8 data, total loans increased by 2.6% yoy (as of July 17, 2024) vs +2.3% yoy at the end of 2023. Moreover, total loans of 19 out of 30 banks from our sample beat estimates in 2Q24 but insignificantly. Despite fees of 23 banks from our sample exceeded estimates in 2Q24, near term outlook couldn’t be called strong, at least for regional banks. In turn, OpEx were roughly in line with expectations and remained well controlled, even despite still elevated inflation. So, we believe that US banks will manage to return to positive operating leverage in 2H24. Due to still strong economic recovery, credit quality remained solid albeit deteriorating. Thus, just 10 banks from our sample missed NCO/NPLs projections while provision expense was lower for 70% of our sample.
Mid-term earnings visibility of US banks continues improving but it is still a bumpy road ahead, at least in the near quarters. We expect that FY EPS of US banks will return to growth in 2025 after three consecutive years of negative dynamics. So, improved EPS growth implies gradual re-rating of US banks, which continue trading at a significant discount to SPX index. Given still high but declining recently interest rates, US banks may remain volatile near term, but we believe so far that banks will end 2024 year in the green on a relative basis. So, we remain bullish on the sector but recognize elevated risks.
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