It’s time to pick positions in bank stocks heading into year end as peak rates could be a “mini clearing event” for the sector, according to Bank of America. “While we are careful to not [get] carried away, peak interest rates do have potential to serve as a mini clearing event for bank stocks,” BofA’s Ebrahim Poonawala wrote in a Sunday note. Bank stocks have come under pressure this year after rising interest rates weighed on profit margins, cut the value of bond holdings and lured away deposits, spurring the regional banking crisis last March. Regional banks are down by 27% this year, and have continued to face intense scrutiny due to their exposure to commercial real estate. Larger banks have also fared poorly since the start of the year. Bank of America itself has lost almost 15%. Citigroup is down 7%. Wells Fargo is unchanged. Shares of JPMorgan Chase , which are higher by roughly 7% this year, have still underperformed the S & P 500’s nearly 14% advance. KRE KBE YTD mountain SPDR S & P Regional Banking ETF vs SPDR S & P Bank ETF in 2023 Still, Poonawala expects lower interest rates could mean reduced risk for bank stocks that are trading “near 80yr lows” compared to the broad market index. It would also mean net interest margin (NIM) pressures could ease next year. NIM measures the difference between income earned and interest paid on an institution’s assets and liabilities. In fact, after the Federal Reserve raised the fed funds rate to 5.5% from 3% in 1994, bank stocks jumped by 54%, compared to a 34% rise in the S & P 500, according to Bank of America. When rates were rising, before the pause, the bank index was down for the year. “While we recognize that no two periods are the same, the combination of discounted valuations and investor comfort around 2024 EPS (consensus -25% YTD) could lead to another bear market bounce,” Poonawala said. “Best case, peak rates could mark near term bottom in bank stocks vs. S & P.” To be sure, there remain issues in the sector. Bank stocks are highly tied to the broader economy and their loans could take a hit if the U.S. falls into a recession. Meanwhile, any resurgence in inflation or interest rates could also hinder the banks. “Across the board, it’s too early to buy these banks,” Bryn Talkington, managing partner at Requisite Capital Management, said Monday on CNBC’s “Halftime Report.” “I still think too many of them don’t have a catalyst outside of valuations, which is never a good catalyst to make a stock go higher.” “So I think you want to be patient and wait till next year,” Talkington added. Still, Poonawala expects now is the time to “selectively add exposure” in opportunities that can work, so long as interest rates have peaked, and there is no recession ahead. He highlighted East West Bancorp and Morgan Stanley , among others. Poonawala is not the only one who has recently been more positive on bank stocks. Last week, billionaire investor Bill Gross said regional banks are poised for a comeback given the prospect of falling interest rates. The PIMCO co-founder disclosed he bought shares of Truist Financial, Citizens Financial , KeyCorp and First Horizon . “Many of them are at 50% of book value, which is historically low. They yield, in many cases, 7% plus with a 40% payout ratio, which provides a decent amount of protection,” Gross said on CNBC’s “Last Call” on Thursday. “I think it’s a good bet relative to some of the Magnificent Seven , and Apple in particular.”
