By Philip van Doorn, MarketWatch
The coronavirus crisis has been brutal for most investors, and bank stocks have taken it especially hard.
Here’s a comparison of total returns (including reinvested dividends) for the KBW Bank Index /zigman2/quotes/210598427/realtime BKX +0.88% , the KBW Regional Bank Index /zigman2/quotes/210598426/realtime XX:KRX +1.00% and the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.44% for 2020 through March 16:
Investors seem to have overreacted
The tremendous decline in bank stock prices “implies loan charge-offs between 7% to 10% [of total loans] on banks of all market-cap. sizes,” Christopher Marinac of Janney Montgomery Scott wrote in a note to clients on Monday.
But he also pointed out that from the first quarter of 2008 through the first quarter of 2011 (the financial crisis and its credit-loss aftermath), annualized gross charge-offs (loan losses, excluding any recoveries from repossessed property or other collateral) for banks with more than $1 billion in assets came to 1.9% of total loans, with gross charge-offs of 1.1% during a “normal recession” from the first quarter of 2000 to the fourth quarter of 2002.
In an interview on the same day, Marinac, the firm’s director of research, said there was a “fundamental disconnect” in the stock market, with investors assuming the banks as a group will lose money. Some of this year’s decline is tied to assumptions based on the 2008-2009 financial crisis, he said.
During that banking crisis, banks suffered tremendous losses as they charged-off commercial real-estate loans with relatively short terms that couldn’t be renewed because collateral properties had lost so much value. This time around, collateral is not the problem.
And whether regulators would make it easier for banks to renew or extend troubled commercial credits during the present crisis, Marinac said: “My answer is a resounding ‘yes.’ ”
“Banks were part of the problem in 2008 and 2009, and now banks are part of the solutions. You will see that happen in different ways. First, extending credit. Second, TDRs [troubled debt restructurings],” he added.
Capital strength and dividends
Eight of the largest U.S. banks announced suspensions of share buybacks March 19, including J.P. Morgan Chase /zigman2/quotes/205971034/composite JPM +1.21% , Bank of America /zigman2/quotes/200894270/composite BAC +1.06% , Citigroup /zigman2/quotes/207741460/composite C +1.78% , Wells Fargo /zigman2/quotes/203790192/composite WFC 0.00% , Goldman Sachs /zigman2/quotes/209237603/composite GS +1.86% , Morgan Stanley /zigman2/quotes/209104354/composite MS +1.96% , Bank of New York Mellon /zigman2/quotes/200171276/composite BK +1.20% and State Street /zigman2/quotes/209758976/composite STT +1.77% .
David Konrad of D.A. Davidson said this move wasn’t necessary to shore up capital, but was important so that banks could show they wanted “to be part of the solution of the crisis rather than blamed for it.”
Konrad is a managing director at D.A. Davidson and a senior research analyst. During an interview, he said the buyback suspensions would have “a low single-digit impact” on the banks’ earnings per share.
“I don’t think we are anywhere near dividend cuts yet, especially with the big banks,” in light of much higher levels of capital, he said. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 greatly increased required capital ratios for banks.