By Philip van Doorn
What would you say if you were told about a company whose stock was trading much lower to expected earnings per share than the S&P 500 Index? At the same time, it’s also expected to increase EPS nearly three times as quickly as the benchmark index through 2023.
That would be Huntington Bancshares Inc. /zigman2/quotes/209314988/composite HBAN +1.64% , which is near the top of a screen of bank stocks, below.
Some banks are better-positioned for rising interest rates than others. These banks are considered “asset sensitive,” because their loans are repricing more quickly than their deposits.
Comparison to S&P 500
The S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.95% trades at a forward price-to-earnings ratio of 20.6, based on weighted aggregate consensus earnings-per-share estimates for the next 12 months among analysts polled by FactSet.
That’s high, but it has fallen. Here’s a chart that shows the movement of the S&P 500’s forward P/E along with those of the Invesco KBW Bank ETF /zigman2/quotes/202716924/composite KBWB +1.62% and the Invesco KBW Regional Banking ETF /zigman2/quotes/201677893/composite KBWR +1.22% :
KBWB tracks the KBW Nasdaq Bank Index /zigman2/quotes/210598427/realtime BKX +1.66% , which is made up of 24 of the largest U.S. banks, excluding the investment banks Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS +0.30% and Morgan Stanley /zigman2/quotes/209104354/composite MS +0.33% .
KBWR tracks the KBW Nasdaq Regional Banking Index /zigman2/quotes/210598426/realtime XX:KRX +1.34% , which has 50 stocks of regional U.S. banks that aren’t included in BKX.
As you can see on the chart, the two groups of banks trade lower than the S&P 500 Index on a forward P/E basis. They usually do. And while all three groups are trading above their 10-year average P/E, this effect is less pronounced for the banks:
|Ticker||Current forward P/E||10-year average forward P/E||Current valuation to 10-year average||Current valuation to S&P 500||10-year average valuation to S&P 500|
|Invesco KBW Bank ETF||/zigman2/quotes/202716924/composite KBWB||13.53||11.89||114%||66%||70%|
|Invesco KBW Regional Banking ETF||/zigman2/quotes/201677893/composite KBWR||14.89||14.28||104%||72%||85%|
|S&P 500 Index||/zigman2/quotes/210599714/realtime SPX||20.60||16.88||122%|
The larger banks as a group tend to trade at about 70% of the S&P 500’s forward P/E valuation. Even though KBWB has returned 38% over the past year, it is still trading a bit lower, relative to the S&P 500, than usual on this basis.
The same cannot be said for the smaller regional banks, with KBWR trading at 85% of the S&P 500’s forward P/E valuation — above its 10-year average of 72%.
In general, ETFs are a good way for investors to play sector trends. Then again, some banks are expected to increase their earnings more quickly than others as interest rates rise.
We’re now at the beginning of what may turn out to be a long cycle of rising interest rates as the Federal Reserve switches policy to fight inflation, after supporting the federal government’s efforts to spur economic growth during the coronavirus pandemic.
The Fed will end its extraordinary bond purchases in March, which will put further upward pressure on long-term interest rates. The central bank is also expected to increase short-term rates several times this year .
Rising interest-rate indexes mean banks will be able to increase the rates they charge on revolving credit lines. Commercial loans typically have relatively short terms and also tend to be renewed — these will reprice at higher rates, increasing banks’ profits. Meanwhile, banks as a group are awash with cash, which means they will have relatively little pressure to increase the rates they pay for deposits.