Here’s a banking data point in the context of that model-breaking, crisis-forgetting, junk-crazy, dash-for-trash.
From Barclays Capital’s excellent first-quarter US bank results preview:
The earnings season kicks off for our coverage on April 14th with JPM. We expect 15 names under coverage to make money in 1Q, while 10 stay unprofitable. Of note, the average bank that is expected to lose money in 1Q (all regional banks) has seen its shares rise 52% year to date, while the average bank that is expected to make money gained a significantly lower 20% (SPX up 7%).
Oh, those wacky investors. Whatever are they thinking?
Here’s what Barclays’ Jason M. Goldberg thinks could be behind the recent regional bank rally:
Drivers for the year-to-date regional bank outperformance in our view includes: a) below tangible book valuations at the start of the year . . . b) relatively low valuations (mid-cap bank trading at 9x normalized EPS on Jan 1, though 14x currently) amid an improving economic backdrop (increased GDP growth, improved job creation); c) TARP repayment schedules appear pushed out . . . while higher stock prices help (higher price, less dilution upon eventual issuance); d) better CRE headlines (CMBX up 5% YTD, certain property values rising/refinancing); e) renewed takeover speculation (which we view as unfounded); and f) the prospects for continued positive asset quality trends in 1Q10. . .
The takeover speculation point is an interesting one. It’s also been picked up by the Reformed Broker who noted on Wednesday that for a regional bank rally of such magnitude to have occurred, you historically “had to have at least one big deal announced and a flurry of rumour-mongering.”
But the Reformed Broker says he hasn’t heard any.
Barclays notes the speculation of course, but thinks it’s unfounded:
Interestingly one of the catalysts for the recent resurgence in regional bank stocks was renewed takeover speculation, while the underperformance of the larger names was exacerbated when the ‘Volcker Rule’ was first proposed. Still, we do not see the return of premium M&A activity anytime soon and believe while regulatory reform is probable, the ultimate outcome won’t be any worse than what was been proposed and shouldn’t change the fundamental strategy of any of the companies we cover. Still, there is a fair amount of uncertainty around both regulatory reform and the recent Basel capital and liquidity proposals.
Regardless of whether M&A is actually about to take place, what should be clear is that the share prices of regional banks are already behaving as if it is. To wit, the below chart from Barclays:
That’s price to pre-provision net revenue (PPNR) for large-cap and mid-cap banks, and the difference between them. Barclays uses PPNR here instead of normalised earnings, which it says tend to vary.
Anyway, here’s what Barclays says the chart shows:
a) on this basis, our Mid-Cap bank composite is already trading at 6.5x, the level it approximated from 1992 until the beginning of the late 1990′s M&A boom after its initial surge post the end of the 1988-91 credit cycle; b) the Large-Cap banks are at a 25% discount to the same time frame; c) the Large-Cap banks are at a 25-30% discount to the Mid-Caps, the largest disparity on record.
Related links:
O-regional gangsta banks hit nosebleed status – The Reformed Broker
Regional banks outperform broader market - WSJ
Regional banks shine in the Americas - FT