US banks underperformed the broad market slightly again in January 2024, for the first time over the last 3 months. But it was the 8th month of underperformance since the start of the last year. Banks also ended the month in the red for the 4th time over the last 6 months.
EXECUTIVE SUMMARY
US banks underperformed the broad market slightly again in January 2024, for the first time over the last 3 months. But it was the 8th month of underperformance since the start of the last year. Banks also ended the month in the red for the 4th time over the last 6 months. Thus, BKX index decreased by 0.3% MoM in January vs +1.6% MoM of SPX index. Absolute January 2024 performance was -0.1 std from the mean monthly performance, and it was in the bottom 40% of absolute monthly performance in the index history. Relative January 2024 performance was -1.9% MoM. It is -0.3 std from the mean monthly performance, and it is in the bottom 32% of relative performance vs SPX index since the inception of BKX index. In turn, despite skyrocketing growth in the last two months of the year, relative performance in 2023 was near multi-decade lows with BKX index underperformed SPX index by more than 23% yoy vs -25.7% yoy in 2020 and a 30-yr average relative performance of -1.6% yoy. Citigroup, BNY Mellon and Popular were among the best performers in January, having increased by more than 4% on MoM basis, driven by stronger outlooks and/or better 4Q23 results. Volatility remained quite high so far, and it skyrocketed in January due to mixed 4Q23 earnings. Thus, a difference of monthly price changes between the best and the worst performers of our sample of banks was 45.9% in January vs just 22.1% in December, mainly driven by significant decline of NYCB. So, volatility in January was the highest one since the last March, when the regional banking crisis began. Unsurprisingly, correlation between price changes yoy and EPS FY24E changes yoy among members of our sample decreased notably, albeit remaining relatively high – at 61% as of the end of the January.
US banks continue trading with a significant discount both to historical averages and to S&P 500 Index, given quite weak performance of US financial institutions on absolute and relative bases in two recent years, even despite noticeable decline of profit and revenue estimates. However, the discount continued narrowing gradually. Thus, median P/E 24E of our group of banks decreased from 10.3x (as of December 29, 2023) to 10.2x (as of January 31, 2024). In turn, median P/E 25E went down from 9.3x to 9.1x for the same period of time. Nonetheless, banks are still trading at -1.2/-1.2 std on P/E CY and at -1.4/-1.1 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 31, 2024). As for relative to S&P 500, banks are currently trading at -1.6 std and -1.6 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 decreased from 1.24x (as of December 29, 2023) to 1.14x (as of January 31). On P/B, banks are trading with a tiny discount, -0.3 std from the sample mean (2010-current moment) vs SPX with +1.6 std, despite the current ROE premiums to historical averages are roughly the same for both BKX and SPX indexes. As for individual names, multipliers are still quite different, and dispersion across banks has increased noticeably ytd, which is not surprising given impact of 4Q23 earnings season. However, dispersion decreased somewhat in 2H23. Nonetheless, WAL’s P/E estimates for the nearest years are around 6-8x while NTRS’s ratios are 11-13x at the moment.
US macro indicators revealed in January were again better than expected. So, GDP growth forecasts continued going up, increasing probability of ‘soft landing’ further. Thus, despite still elevated rates, relatively high inflation, inverted yield curve since 3Q22 and tightening lending standards, US GDP increased by 4.9% qoq and 3.3% qoq at annualized rate in 3Q23 and 4Q23, respectively, vs 2.7% qoq and 2.6% qoq in 3Q/4Q22. Nonetheless, both hard and soft data qtd imply that the GDP growth rate will decelerate notably in 1H24 albeit remaining positive. Moreover, the probability of recession in the nearest year has already been estimated below 50%. It is expected that the US GDP will increase by more than 1.5% yoy in both 2024 and 2025. In turn, after significant decline of the rate expectations in 4Q23, driven by dovish Fed’s meetings accompanied by lower inflation data, rates moved slightly back in January. Nonetheless, the discussion continues to revolve around whether the first rate cut will be in 1Q24 or in 2Q24. Moreover, it is still expected that there will be 5 rate cuts till the end of the year, which means significantly eased pressure from funding costs on NII/NIM in the near term. So, despite it is too early to say that the US economy has already been completely out of the woods and that inflation battle has already won, we believe that the worst is over for the US economy, even taking into account gradual cooling of the labor market and still negative leading indicators. However, the current economic scenarios do not imply any meaningful improvement of banking fundamentals in next two quarters either.
4Q23 earnings were mixed but underlying fundamentals beat expectations. Reported figures were distorted by one-timers but 4Q23 results confirmed our belief that 2024 is the turning point for banking fundamentals. So, even conservative banking outlooks didn’t worsen the market perception of the results, what could be expected, given quite strong rally in banks during the last two months of 2023. Thus, 21 out of 30 banks from our sample reported better than expected EPS. Median surprise was +5.6% vs +5.8% in 3Q23. Revenue of 16 out of 30 banks from our sample exceeded estimates in 4Q23 with median surprise of +0.3% vs +0.6% in 3Q23. The main drivers of better revenue and EPS figures were higher NII/NIM figures which were the key focus for investors during the earning season, given notable decline of rate expectations, ongoing growth of deposit/funding beta, subdued loan growth and weak NIBD trends. Thus, 21 out of 30 banks from our sample reported better than expected NII. Median surprise was +0.8%. NIM of 17 out of 28 banks for which estimates were available exceeded estimates in 4Q23 with median surprise of +1.1 bps. Nonetheless, NII of our sample of banks decreased by 8.6% yoy in 4Q23 while median NIM tumbled by 41 bps yoy to 2.92%, the 4th consecutive quarter of decline. And NIM continues going down in 1H24. But even despite NIM estimates decreased ytd after better 4Q23 figures, we expect that a minimum of the ratio will be reached in mid-2024. In turn, 4Q23 fees were weaker than expected but FY24 outlook improved. Reported OpEx missed expectations significantly, driven by the FDIC special assessment and other one-timers. Thus, it was higher than expected for all banks from our sample except for BNY Mellon. Nonetheless, underlying expenses remained well-controlled. So, FY24 OpEx is expected to increase just by 1% yoy, implying that US banks may return to positive operating leverage in 2H24. Credit quality remained strong but deteriorating with key metrics (NCOs, NPLs, provisions) roughly in-line with expectations in 4Q23 – deterioration was mainly driven by cards and office CRE. Despite better 4Q23 earnings, EPS/revenue estimates of our sample of banks were flat/down ytd.
Mid-term earnings visibility of US banks continues improving but it is still bumpy road ahead, at least in 1H24. 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 risks and ongoing decline of EPS/revenues, US banks may be volatile in 1H24, but we believe that banks will end 2024 year in the green on a relative basis. So, we still remain bullish on the sector but recognize still high risks.
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