With interest rates slashed to zero, and the Fed taking additional measures to shore up the economy as the coronavirus alarm plays out, investors should be seriously watching bank stocks, according to Morningstar.
The Fed’s announcement over the weekend that it would cut the federal-funds rate an additional 100 basis points to a range of 0% to 0.25%, and increase its holdings of Treasury and mortgage-backed securities, creates more opportunities for investors who are interested in bank stocks, Morningstar analyst Eric Compton said in a new blog.
“When bank stock prices imply that bad times will never end, we think the odds shift in the favor of long-term investors. We believe investors should be seriously watching and considering bank stocks as this plays out,” Compton said.
Prior to these announcements the Fed had been running off its current MBS portfolio. Finally, the Fed announced a series of measures to support the flow of credit to households and businesses, including lowering its discount window rate; reducing reserve requirements for banks to zero; encouraging bank to tap into capital and liquidity buffers when needed to support lending to households and small businesses; and the extension of intraday credit to banks as needed, Compton said.
While there are quite a few moving parts in the Fed's actions, the most notable and consequential is the rate cut to zero, which will hit net interest income for a slew of financial firms, and weigh on money market managers who will likely have to resort to fee waivers, he added.
“We expect the final hit to fair value estimates will likely be in the low-single-digit percentage range on average,” Compton said.
“We remind investors a few bad quarters of earnings are not that important when it comes to the intrinsic value of a firm over its lifetime,” he added.
At this point, no one knows how long rates will stay at zero or what the overall impact of coronavirus will be on the U.S. and global economy. Compton said he does expect bank earnings will come under pressure in the short term as rates move to near zero.
Having already updated most of its bank valuation models after the last rate cut just two weeks ago, the analyst said Morningstar is going to hold off on updating them until they get clearer guidance from bank management teams during the release of first-quarter earnings.
After suffering steep losses in recent weeks due to a confluence of negative events, banks stocks rebounded sharply on Friday due to a slight rebound in interest rates. Mega-banks JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, along with smaller banks such as SVB Financial, Western Alliance Bancorporation and Axos Financial, surged as much as 18% on Friday.