The SPDR S&P 500 ETF Trust SPY is now down 23.7% in the past month as stocks enter bear market territory for the first time since 2009. The Financial Select Sector SPDR Fund XLF has taken an even larger 31.2% hit in that time as investors recall what happened to bank stocks during the last U.S. economic downturn.
However, BofA Securities analyst Erika Najarian said Friday that 2008 and today are like night and day for U.S. bank stocks. In the event the coronavirus triggers a global recession, Najarian said bank stocks will take roughly a 50% earnings per share hit. However, Najarian said bank stocks tend to trade more on their total book value than their EPS during recessions, and she said TBV levels will likely not be negatively impacted by a recession.
BofA recently stress tested U.S. bank stock balance sheets based on mild, moderate and severe recession scenarios, and Najarian said the stressed TBV of the group was roughly 7% higher than the actual year-end TBV among the large cap U.S. bank group.
“In other words, given that banks are unlikely to print negative EPS even in a recession, TBV should still grow,” Najarian wrote in a note.
She said today’s banks have enough earnings power to stay profitable even during a recession, and that earnings power also allows them to preserve capital losses due to rising provisions.
“While recent declines in interest rates have dimmed the outlook for bank profitability, the elevated level of capital and liquidity on banks’ balance sheets, built in response to the post-crisis regulatory era, suggests banks are better positioned to absorb unforeseen losses without requiring the bank to cease operations,” Najarian said.
Bank of America found the following four large cap U.S. banks have the least TBV downside based on their recession stress test analysis:
Regions Financial Corp RF
- M&T Bank Corporation MTB
- JPMorgan Chase & Co. JPM
- PNC Financial Services Group Inc PNC
Not only will financial market conditions likely not get as extreme as 2008 and 2009 in the event of a coronavirus-driven U.S. recession, post-crisis banking regulations have bank balance sheets much healthier today than they were back in 2008.
Bank stock investors may not have liked how much new capital requirements ate into earnings over the past 11 years, but those same regulations could help protect the banks’ book value if a recession is imminent.
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