As featured on the website Travilliannext.com on January 12, 2023
The consensus view is that last year’s challenges will extend well into the new year
Coming on the heels of a very challenging year for markets and bank stocks in 2022, many believe there will be no respite in the new year ahead. Geopolitical tensions, inflation, recession, higher interest rates, and Quantitative Tightening (QT) – so the thinking goes – will translate to reserve build for credit losses; deposit outflows; higher funding costs, balance sheet liquidity concerns and squeezed margins; slowing loan growth; higher expenses; and depressed “market sensitive” and mortgage-related fee revenues at banks.
Against that perceived backdrop, it’s no wonder that Wall Street sentiment toward the bank sector is, to put it bluntly, pretty awful, with sell-side research analysts downgrading the sector in masse last month and so far early this year, and buy-side investor sentiment arguably even worse. And per the CSBS’ Community Bank Sentiment Index, community bankers have joined the negativity brigade as well (https://www.csbs.org/cbindex). Indeed, the most recent measurement suggests that community banker sentiment is lower than at any point in the last several years, including during the depths of the COVID pandemic! Specific drivers of bankers’ sour sentiment include inflation, government regulation, the cost and availability of labor, and cyberattacks (but interestingly, not asset quality – more on this below).
These considerations in the aggregate have driven bank stocks to just about the lowest absolute and relative P/E multiple in over two decades – yes, including during The Great Recession of 2008.
