A tough year for banks has left shares cheap, but Wall Street analysts are still hesitant to declare it’s all-clear for the sector as concerns over credit markets loom.
Valuation “isn’t enough of a catalyst” given the risk of worsening credit for the coming year, Keefe, Bruyette & Woods analysts said in a note, reiterating their market weight outlook for the industry. That sentiment echoed Morgan Stanley analysts who maintained their in-line view for both large cap and midcap banks while taking a positive bias on the group, citing a need for more clarity on credit and interest-rate path.
“Bank stocks have lagged and valuations are cheap, but can they work ahead of a potential credit cycle?” Keefe, Bruyette & Woods analysts Christopher McGratty and David Konrad wrote, adding that earnings risk is shifting to credit conditions from deposit costs.
In the wake of Silicon Valley Bank’s failure, a gauge of bank stocks is down 13% this year as firms competed for deposits and large banks navigated proposals for higher capital requirements.
While bank stocks are sharply lagging the S&P 500 Index’s 19% rally, KBW and Morgan Stanley analysts are flagging that risks linger and complicate the sector’s path higher.
