Shares of the largest U.S. banks have staged a recovery following the stock market’s pandemic low point last year.
Trailing the broader market Bank stocks were hit hard during the early part of the pandemic in 2020. Decisive action by the federal government and the Federal Reserve helped set up a speedy recovery and significant subsequent gains for the broad stock market, but not for the banks as a group. John Buckingham, the editor of the Prudent Speculator newsletter and portfolio manager of the Al Frank Fund VALUX, +0.61%, called the action for bank stocks “puzzling,” because “all they do is continue to beat” analysts’ earnings estimates quarter after quarter, despite narrow margins.
The weighted aggregate forward P/E ratio for the S&P 500 has increased to 21.8 from 18.4 at the end of 2019. Meanwhile, the forward P/E for the banks has declined slightly to 11.8 from 12.1. Citigroup is the only stock listed here trading below its March 31 tangible book value. Citi also traded at the lowest forward price-to-earnings ratio.
Kotowski expects JPM to reduce its common-share count by 2.7% in 2021 and 4.9% in 2022, while he expects Citi to retire 3.1% of its shares this year and 7.7% in 2022. Kotowski has a neutral “perform” rating for JPM, while he rates Citi “outperform.” Seven of the 12 banks are expected to report higher net interest income for the second quarter than for the first quarter. However, all are expected to show declines from a year earlier, except for Goldman Sachs, Morgan Stanley, PNC and Capital One.
Provisions for loan losses A bank’s provision for loan losses is the amount it adds to loan loss reserves to cover expected losses on problem loans. The provisions directly lower pre-tax income. Provisions were very high during the first and second quarters of 2020 because of the pandemic. But the unprecedented stimulus from the federal government, including increased and extended unemployment benefits and moratoriums on evictions and foreclosures, stifled loan losses.
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