U.S. Banks - What Is The Market Telling Us?

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Includes: BAC, BK, C, COF, GS, JPM, KBE, KRE, MS, PNC, SPY, USB, WFC
by: Daryl Montgomery

Summary

It is generally believed that U.S. banks are much stronger than European banks.

While this is true, U.S bank stocks have underperformed the S&P 500 during the last 10 years.

Major U.S. banks can be divided into three tiers, with the top tier OK, the bottom not so much.

The market seems to be telling us that some very big U.S. banks are as troubled as their European counterparts.

European bank stocks were struggling in the first quarter of 2016 and four of them were even trading below their Credit Crisis lows from 2008/09, a time when stocks in most countries were devastated. The steep price declines in European banks were one of the major factors that led to the global stock selloff in the beginning of the year (the banks actually started declining in mid-2015). There are many explanations for problems with Europe's banks, two of which are a large amount of non-performing loans and negative interest rates. Neither of these issues exist in the United States (non-performing loans have been falling for years) and American banks are considered to be in excellent shape compared to those in Europe. Is the market confirming this widely held view?

There is no question that U.S. banks were in serious trouble during the Credit Crisis years, hence the need for the TARP bailout and a number of Federal Reserve policies that were created specifically to help keep them afloat. It is generally believed that a full recovery took place subsequently. However, investors in most bank stocks would probably disagree. The S&P 500 (NYSEARCA:SPY) is up approximately 60% in the last ten years. It is well above its high prior to the Credit Crisis. The same can't be said for the average U.S. bank stock. Regional banks (NYSEARCA:KRE) have done better than the industry as a whole, but are still down 20% in the last ten years. A broader-based measure of U.S. banks (NYSEARCA:KBE) is down more than 40% during the same period. Neither has gotten back to their highs before the 2008/09 Credit Crisis as can be seen in the chart below (the black line is SPY, the blue line KRE, and the yellow line KBE).

Ten Year Bank Stock Performance Versus the S&P 500

While the overall picture for banks is pretty negative, stock performance of the majors can be divided into three tiers. The top tier has performed almost as well as the S&P 500 has in the last ten years and their current stock prices are above their pre-Credit Crisis highs. Major U.S. banks in this group include: Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), and U.S. Bancorp (NYSE:USB). Long-term investors should consider these banks as offering them the best prospects. It should be noted that none of these banks outperformed the S&P 500. They were up only approximately 30% to 43% versus the S&P's price rise of 60%. In the chart below, the S&P 500 is the black line, WFC the blue line, JPM the yellow lie and USB the red line.

Top Performing U.S. Banks Versus the S&P 500

Banks in the second tier are those that at least broke even in the last ten years or are up a little. This group includes: PNC Financial (NYSE:PNC), Bank of New York Mellon (NYSE:BK) and Goldman Sachs (NYSE:GS). Goldman became a bank during the Credit Crisis to take advantage of bank bailout programs. Only PNC is above its pre-Credit Crisis high. BK and GS stocks have basically broken even over the last ten years, while PNC is up a little over 15%. In the chart below, the S&P 500 is once again the black line and PNC is the red line, BK the yellow line and GS the blue line.

Major US Bank Stocks that Have Broken Even in the Last 10 Years

The third tier of U.S. bank stocks are those that are down substantially in the last ten years (while the S&P 500 was up 60%). This group includes: Capital One Financial (NYSE:COF), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC) and Citigroup (NYSE:C). Like Goldman Sachs, Morgan Stanley only became a bank during the Credit Crisis. Citigroup and Bank of America are the worst performing of the major banks being down approximately 90% and 70% from ten years ago. The market is telling us that it doesn't have much confidence in these banks. In the chart below, the S&P 500 as usual is the black line, COF the blue line, MS the orange line, BAC the red line and C the yellow line.

Worst Performing Major U.S. Bank Stocks in the Last 10 Years

U.S. banks have not been a great investment during the last ten years. Buying an S&P 500 index fund would have yielded a better return. Nevertheless, they have performed better as a group than major European banks, although this really can't be said about the banks at the bottom. These include Bank of America and Citigroup, the second and third largest U.S. banks by total assets. While the next system-wide bank crisis is likely to emanate from Europe (or possibly Japan), some major U.S. banks are vulnerable as well and this should give investors pause.

More about the problems in European banks can be found here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.