Unloved sectors can sometimes offer the best opportunities, and this year, few sectors have received more scorn than banks.
None of that is good news for banks, but it is old news—and largely baked into the stocks. So far this year, the SPDR S&P Regional Banking exchange-traded fund is down 30% and trading at nine times 12-month forward earnings. Several bank stocks, including Truist Financial —this week’s Barron’s stock pick—and Huntington Bancshares , trade at or below their book value, further suggesting that they are undervalued.
But bullishness on banks isn’t just about technical indicators. While the sector has challenges, it also appears to be equipped to deal with them. Credit concerns appear to be manageable. Consumer delinquencies are rising but are still well below pre-Covid levels. And because everyone has been fretting about a recession for nearly two years, banks have since adjusted their lending and reserves to deal with it, should one materialize.
Higher-for-longer interest rates are another concern for investors, with banks sitting on $558.4 billion in unrealized losses in their bond portfolios as of the end of the second quarter. Higher rates also mean banks face higher funding costs, which will squeeze the spread they earn on interest-earning assets and pay on liabilities. But even though rates will remain high, they will not increase at the rapid clip we saw over the past 18 months, one of the fastest on record.
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