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These bank shares can be crushed if the Fed continues to cut interest rates




The looser monetary policy of the Federal Reserve does not bode well for bank profits. And a new report from Keefe, Bruyette & Woods analyst Frederick Cannon paints a far uglier scenario if the United States moves closer to the negative interest rate environment in other developed economies.

Cannon's report was published on September 25 and included price-to-earnings ratios (P / E) based on KBW's earnings estimates for 2021, and also another set of P / E ratios based on a scenario in which federal fund prices move. to a range of 0% to 0.25% by the end of 2020 and the yield on 10-year US government bonds

TMUBMUSD10Y, -2.25%

"goes negative" in Q3 2020.

While there may still look a long way to having negative returns in the US, it is important to keep in mind that the rate for federal funds was 0% to 0.25% for seven years through December 16, 2015. We can easily go back there, and if demand for the US dollar continues to be strong, negative returns on the 10 -year bond may even be, unless a significant strengthening of the economy forces the Fed to change direction again.

Cannon also analyzed another scenario that combines low prices with a recession. But in this article, we only look at numbers taken from the negative interest rate scenario and leave a recession.

Negative interest rates will not only affect banks, they will also hurt most financial services companies whose profits depend on the spread between what they pay for financing and what they earn on loans. Charles Schwab

SCHW, -2.18% ,

The pioneering discount broker who is technically a savings and loan holding company is a good example. The company announced this month that it would cut 600 jobs, with CEO Walt Bettinger citing the decline in interest rates.

According to Schwab's second-quarter income statement, net interest income was $ 1.61 billion, or 60% of total net income. Schwab's shares trade for 16.2 times KBW's current estimate per earnings per share in 2021, but for 41.8 times the EPS estimate for 2021 under the company's “negative interest rate scenario.” Under that scenario, KBW's 2021 revenue estimate for Schwab falls 61% to one dollar per share from $ 2.58.

Here are the 20 financial services companies in KBW's coverage universe whose earnings estimates will sink most during the company's negative interest rate scenario:

Company Ticker Final Price – September 25 KBW's current 2021 EPS estimate [19659012] KBW's 2021 EPS estimate under negative interest rate scenario KBW's 2021 EPS estimate falls under negative interest rate scenario P / E – current 2021 EPS estimate P / E – scenario 2021 EPS estimate
Charles Schwab Corp.

SCHW, -2.18%

$ 411 $ 2.58 $ 1.00 [19659021] 61.2% 16.2 ] 41.8
E-TRADE Fina ncial Corp.

ETFC, -4.81%

$ 44.12 $ 3.90 $ 1.85 52.6% 11.3 23.8
SVB Financial Group [1965903535] SIVB, -3.74%

$ 214.05 $ 17.00 $ 10.50 [19659021] 38.2% 12.6 20.4
CIT Group Inc.

CIT, -0.99%

$ 45.68 ] $ 5.01 $ 3.12 37.7% 9.1 14.6
TriState Capital Holdings Inc.

TSC, – 2, 76%

$ 21.71 $ 2.16 $ 1.35 37.5% 10.1 16.1
ProAssurance Corp .

PRA, -0.35%

$ 40.67 $ 0.79 $ 0.51 35.4% 51.5 79.7
Interactive Brokers Group Inc. Class A

IBKR, -0.43%

[19659021] $ 51.73

$ 2.42 $ 1.56 35.5% 21.4 33.2
Comerica Inc. [19659075] CMA, -0.79%

$ 65, 50 $ 6.98 $ 4.59 34.2% 9.4 14.3
Zions BanCorp. NA

ZION, -0.92%

$ 44.37 $ 4.40 $ 3.09 29.8% 10, 1 14.4
M&T Bank Corp.

MTB, -0.22%

$ 157.24 $ 14.63 $ 10.36 29.2% 10.7 15.2
Citizens Financial Group Inc.

CFG, -1.24%

$ 35.60 $ 4.05 $ 2, 90 28.4% 8.8 12.3
Metropolitan Bank Holding Corp.

MCB, – 0.96%

$ 40.82 $ 5.26 $ 3.80 27.8% 7.8 10.7
Amalgamated Bank

AMAL, -0.37%

[19659021] $ 16.16

$ 1.60 $ 1.16 [19659021] 27.5% 10.1 13.9
Fifth Third Bancorp

FITB, -0.98%

$ 27.66 [19659021] $ 3.24 $ 2.35 27.5% 8.5 11.8
East West Bancorp Inc.

EWBC, -2.96%

$ 45.60 $ 4.60 $ 3.40 26.1% 9.9 13.4
Western Alliance Bancorp [19659135] WAL, -1.74%

$ 46.53 $ 4.45 $ 3.30 25.8% 10.5 [19659021] 14.1
Huntington Bancshares Inc.

HBAN, -0.80%

$ 14.37 $ 1.28 $ 0.95 [258% 11,2 [19659021] 15.1
UMB Financial Corp.

UMBF, -1.67%

$ 65.82 $ 4.25 $ 3.20 24.7% 15.5 20.6
Wintrust Financial Corp.

WTFC, -1.72%

$ 65.61 $ 6.0 $ 4.55 24.8% 10.8 14.4
Provident Financial Services Inc.

PFS, -2.06%

$ 25.22 $ 1.59 $ 1, 20 24.5% 15.9 21.0
Sources: Keefe, Bruyette & Woods, FactS et

The much higher P / E ratios for many of these companies emphasize how deeply negative interest rate scenario can be. And these numbers do not even reflect the opportunity for a recession to go along with the negative rates.

Here are the same data for the "big six" US banks:

Company Ticker Closing Price – September 25 KBW's current 2021 EPS estimate KBW's 2021 EPS estimate under negative interest scenario KBW's 2021 EPS estimate decline under negative interest scenario P / E – current 2021 EPS estimate P / E scenario 2021 EPS estimate
JP Morgan Chase & Co.

JPM, -0.82%

$ 118.00 $ 10.70 $ 9.83 8.1% 11.0 12.0
Bank of America Corp.

BAC, -0.41%

$ 29.25 $ 3.08 $ 2.75 10.7% 9.5 10.6
Citigroup Inc.

C, -0.39%

$ 69.38 $ 8.40 $ 7.75 [19659021] 7.7% 8.3 9.0
Wells Fargo & Co.

WFC, -0.79%

$ 49.26 $ 4.40 $ 3.94 10.5% 11.2 12.5
Goldman Sachs Group Inc.

GS, – 0.86%

$ 210.03 $ 25.75 $ 25, 39 1.4% 8.2 8.3
Morgan Stanley

MS, -0.98%

[19659021] $ 43.04

$ 5.35 $ 4.99 6.7% 8.0 8.6
Sources: Keefe, Bruyette & Woods, FactSet

It's fascinating to see that Even under the negative interest rate scenario, the largest banks' P / E value may not be much higher.

Don't miss: A Bond Fund that Gives Over 5% – How These Aggressive Managers Provide Extra Return

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