Bank stocks have sold off this year on fears that the coming recession will rock the sector with an increase in loan defaults. But that reflex is an example of recency bias and ignores several key differences in the US financial industry since the 2008 financial crisis, Oppenheimer analyst Chris Katowski said in a research note on Friday. “The narrative has shifted to the idea that inflation is so hot that the Fed is going to have to raise rates so much that it’s going to push the economy into a recession, and if we do go into a recession, you know for a fact that you don’t want to own any bank stocks,” Katowski said. . Examining the past three recessions, Katowsky said investors are spooked by the possibility of another 2008 situation in which bank stocks find themselves at the epicenter of financial problems due to a bubble. In this cycle, bank stocks did not bottom until the end of the recession — a good reason to avoid the sector. now, just when you thought there was going to be a repeat. “If you look at the 2008 recession, you see what everyone was afraid of,” the analyst said. “Banks only bottomed out at the end of the recession, and stocks were weak and volatile for years after that.” But the current situation reminds Katowsky most of the recession of 2001, not 2008, he said. “We don’t see an oversupply of commercial or residential real estate or other large long-term assets,” said Katovsky. “Indeed, the banking numbers, with very strong loan growth and interest rate increases, continue to point to a very strong economy. Some items may be spending less, but service and T & E costs look robust.” And in the analogy of 2000-2001, bank stocks bottomed out long before the official start of the recession — 13 months ago, according to the analyst. Much of the sector’s success back then was achieved in those turbulent months before the recession hit, he added. “If we had waited for the recession to start, we would have missed BKX’s 29.5% gain during a period when the S&P was down 8.6%,” Katowski said. “That’s one heck of a relative performance to miss.” During the previous recession of 1989-1990, bank stocks bottomed out at the beginning of the recession and partially recovered by the end of it, he added. So every recession is different, and the 2008 fix is a purely recent blip, he concluded. Thanks to a much tighter regulatory regime, better underwriting standards and capital levels that have roughly doubled since the 2008 crisis, banks are in much better shape to fight the next recession, the analyst said. “We expect that whenever the next recession hits, the banks’ asset quality will remain much better than commonly feared and that the group will return the rating to its historical level,” Katovsky wrote. The sector as a whole is “too cheap” as it trades at about 50% relative price-to-earnings, compared to a historical average of more than 70%, the Oppenheimer analyst wrote. While Katowski said Goldman Sachs, Citigroup and Silicon Valley Bank are probably the cheapest banks to buy now, he prefers Bank of America, US Bancorp and “to a lesser extent” JPMorgan Chase. That’s because they will benefit the most from a sharp rise in interest rates and strong credit growth, which will fuel their core banking operations, boosting revenues in addition to rising costs, he said. “There may be more long-term upside in some of the other names, but the upside here is also very positive, and we expect it to work sooner,” Katowski said. “We believe the operating leverage in BAC and USB will be very evident over the next 2-3 quarters.”
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