Bank Stocks Can’t Catch a Break With Rates Staying Elevated

(Bloomberg) — There may not be respite in sight for beaten-down bank stocks as attention shifts to 2024 and a prolonged period of elevated rates, according to analysts. 

Midsized banks are “not out of the woods yet,” said Morgan Stanley’s Manan Gosalia in a note on Wednesday. Meanwhile, Wedbush and Truist Securities analysts said the group will continue to be challenged in 2024. 

“‘Survive until 2025’ is a phrase that has been recently attributed to [commercial real estate] investors/borrowers, but we think the saying also applies to Regional and Community banks as higher interest rates weigh on profitability,” Truist Securities analyst Brandon King wrote.

Bank stocks have been roiled this year by the collapse of multiple regional lenders, including Silicon Valley Bank. The sector has failed to stage a meaningful rebound since the tumult began in early March, with the KBW Bank Index down 23% this year, compared to a 11% gain for the S&P 500 Index. 

The sustained pressure that banks face having to pay more to hang on to their deposits amid high interest rates adds to the list of woes for the hard-hit group, which is also facing heightened regulatory expectations. Those issues, combined with uncertainty around credit resilience in an economic downturn, have pushed investors to the sidelines even as the sector’s valuations have cheapened.

“Street estimates are too optimistic for 2024 net interest income in a higher for longer environment,” Gosalia wrote. 

Gosalia, who cut his recommendations on Zions Bancorp and Valley National Bancorp to underweight Wednesday, expects the upcoming third-quarter earnings season to be a so-called sell-the-news event.

Wedbush’s David Chiaverini anticipates upcoming earnings will be “underwhelming,” but that net interest income guidance cuts should be less harsh than in recent quarters. He’s still maintaining a cautious outlook for the sector, saying that consensus estimates for 2024 may be elevated because they probably incorporate funding cost relief given prior expectations for more significant rate cuts.

“The acute phase of bank stress is clearly over, but in its wake several challenges have become exacerbated including funding challenges, balance sheet constraints, dampened loan demand, and potential negative credit migration as CRE maturities are dealt with,” he wrote. “We believe these headwinds could weigh on bank valuations into 2024.”

(Updates throughout to market close.)

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