The Sell-Off of Bank Stocks Was Indiscriminate: That Makes for Some Bargains
Wednesday morning, as the financial sector bled along with the rest of the market, YCharts asked whether the rout had turned bank stocks into bargains. The question is worth revisiting.
Bank shares recovered somewhat after we asked that question in the late morning, but they still closed down sharply for the day -- ranging from a 3.7% drop for Citigroup (C) to Morgan Stanley's (MS) 6.25% decline, as seen in a stock chart:
But cheap stocks aren't always bargains, and some of the hard-hit banks are more appealing than others.
Even after the sell-off, for example, Regions Financial (RF) and Bank of America (BAC) traded at hefty PE ratio. Both are also trading below book value, and report returns on equity of just 1% and 2%, respectively. The combination could suggest investors have little faith in their asset valuations, and are overpaying for their earning power.
By contrast, some smaller banks caught up in the sell-off may be more attractive. Huntington Bancorp. (HBAN) saw its shares fall 5.4% yesterday, but it boasts a return on equity of 11%, and a PE ratio of about 6.6. It's also trading right about at book value.
What's most curious about Huntington and other regional banks beat up in the selloff -- such as Zions Bancorp. (ZION), which fell about 4.9% yesterday -- is that they aren't inherently high-risk enterprises.
Like all banks, they'll probably have to hold more capital as new regulations start to kick in. That's almost certain to depress results over time, pushing return on equity to the high single digits from the teens, by some projections.
But those regulations have been in the works for a couple years, and shouldn't come as any surprise. Meantime, plain-vanilla banks didn't goose results by branching out into high-risk business lines like the big banks did, and so aren't likely to see as big a hit from regulatory initiatives designed to reduce the risk of another financial crisis.
It's also worth noting that, despite yesterday's sell-off, banks as a group are outperforming the S&P 500 by more than 10 points over the last 12 months, and most of the big banks are doing so as well. (Not included in the chart below: Morgan Stanley, which is down nearly 4% over the same period.)
Another puzzle buried in yesterday's sell-off was why other financial firms -- ones very likely to face tough new regulations -- actually fared a little better than the banks: Pawn brokers and cash-advance companies.
High-interest lenders are almost certain to face tougher regulation as the new Consumer Financial Protection Bureau moves ahead, supported by a sympathetic Administration. Yet First Cash Financial (FCFS), Cash America International (CSH) and DFC Global (DLLR) saw their stocks fall by less than many of the banks.
Theo Francis is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.