US bank reporting season is almost upon us and we’re looking forward to investigating the mysteries surrounding the performance of the bulge bracket since the turn of the year.
To give you a sense of how bad it’s been for the 1 per cent, here’s an interesting table from a Goldman Sachs research note published Tuesday:
Bank of America and Citigroup performance is unsurprising but even the mighty JPMorgan Chase has slipped below book in Q3. The six days it traded under book value in Q3 2011 represent about 20 per cent of such days in the last five years, writes Goldman. (US investors should think themselves lucky. Domestic UK banks trade on around 0.5 times book and have done for months – Ed).
Goldman itself is in for a rough quarter, according to analysts. Indeed, Citigroup took the red pen to its forecasts on Tuesday, lowering its forecast for the Vampire Squid to a loss per share of 65 cent from its earlier forecasts of a 10 cent profit.
Analysts at Deutsche Bank note drop in that US banks 40 per cent fall from February 14 to October 3 is only the sixth such decline in history.
Lots to consider, then, before JPMorgan starts the season this Thursday, followed by Citigroup and Wells Fargo (Oct 17), Bank of America and Goldman Sachs (Oct 18), and Morgan Stanley (Oct 19) bringing up the rear.
In the meantime here’s a bit more historical context from the DB note:
40% pullback in bank stocks is just the 4th in nearly 50 years
From Feb 14 through Oct 3, bank stocks (BKX) declined a massive 40%. In the 45 years of daily bank stock performance data we have available, this was only the 6th such decline and 4th if we combine three 40%-plus declines in 2008/2009 (there were two 20%-plus rallies separating these sell offs). Note that since 1963, bank stocks have declined 20%-plus 22 times and 14 times if we combine sell offs that were close to one another in date (but separated by at least a 20% rally).
Bank stocks rise a bit more than average AFTER a sharp pullback…
Since there have been just a few declines of 40% or more, it’s difficult to point to any trends—so we’ll focus on 20%-plus declines instead. In the 22 times bank stocks declined at least 20%, bank stocks were higher just 55% of the time one month later, ~ 60% of the time 3/6 months later and 67% 12 months later. If we exclude the 4 bear markets during the 2007-2009 crisis, bank stocks were higher 70-75% of the time 3/6/12 months later. This compares to the market rising 65% of the time in any given calendar year (since 1897).
…but gains are less than we would have thought
Following a 20% decline, on average, bank stocks were flat after 1 month, while increasing a modest 2% after 3 months, 4% after 6 months and 14% after 12 months. If we exclude the 2007-2009 period, returns were higher by 100-600bps across each period (see page 2).
How low can they go?
Using earnings seems fruitless…and even book has drawbacks given some may not be marked properly, future capital raises at some banks are possible and returns may be low for a prolonged period. In 2009, bank stocks bottomed at 0.4x tangible book (at least for those that survived). But going back to these levels (vs. 0.9x currently) doesn’t make sense given banks have much more capital, liquidity, and loan loss reserves and have already absorbed huge losses. Plus, we don’t expect another global financial crisis (and certainly not one that’s as punitive to banks as the last one was). For what it’s worth, in the 5 previous periods of 40%-plus declines, bank stocks fell an average of 52% before rallying at least 20%.
So, it’s gonna get worse before it gets better.