(Bloomberg) -- A tough year for banks has left shares cheap, but Wall Street analysts are still hesitant to declare it’s all-clear for the sector as concerns over credit markets loom.
Valuation “isn’t enough of a catalyst” given the risk of worsening credit for the coming year, Keefe, Bruyette & Woods analysts said in a note, reiterating their market weight outlook for the industry. That sentiment echoed Morgan Stanley analysts who maintained their in-line view for both large cap and midcap banks while taking a positive bias on the group, citing a need for more clarity on credit and interest-rate path.
“Bank stocks have lagged and valuations are cheap, but can they work ahead of a potential credit cycle?” Keefe, Bruyette & Woods analysts Christopher McGratty and David Konrad wrote, adding that earnings risk is shifting to credit conditions from deposit costs.
In the wake of Silicon Valley Bank’s failure, a gauge of bank stocks is down 13% this year as firms competed for deposits and large banks navigated proposals for higher capital requirements.
While bank stocks are sharply lagging the S&P 500 Index’s 19% rally, KBW and Morgan Stanley analysts are flagging that risks linger and complicate the sector’s path higher.
“Entering 2024, we’re more confident that the first leg of the ‘EPS revision race’ is nearing the finish line but questions remain around the baton handoff to normalizing credit,” McGratty and Konrad wrote.
Morgan Stanley analysts led by Manan Gosalia are “warming up” on bank stocks, shifting their negative bias to positive because of the cheap valuations and abating net interest margin pressures. However, “it’s too early to have high conviction” as the path for rate cuts and credit is still unknown.
“We believe it’s time for investors with a time horizon of 2+ years to increase exposure to the group, but those with a shorter-term view should stay nimble,” the Morgan Stanley analysts wrote in a note earlier this week. “Bank stocks don’t do well during periods of deteriorating credit.”
--With assistance from Katrina Compoli.
(Updates share-price moves and chart.)
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