Bank earnings have been running hot, but having bid the sector sharply higher for nearly all of 2016, and particularly since the election, investors are selling the news.
The latest two examples are Morgan Stanley (MS -2.2%) and Comerica (CMA -4.2%), both of which blew past estimates this morning. Comerica, for instance, is up a tidy 85% Y/Y, including a 38% run over the last three months.
Yes, it was the holiday season, but don't discount the big move lower in the MBA mortgage application index over the past two weeks, says Piper's Kevin Barker. The latest data supports Barker's and team's view that refinance volume could drop 40-50% in Q1 from Q3 of 2016.
In addition to lower volume, limited demand for mortgages is likely to cause gain-on-sale margins to decline in the near-term, says Barker.
The SPDR KBW Bank ETF (NYSEARCA:KBE) is now up 18.9% YTD - this after a miserable start to 2016. Since February 11, the fund is higher by 46%. Since July 1, it's up 32%, and since the election 15%.
With bullish price targets being hit and surpassed across the sector, the downgrades are pouring in.
Among them, U.S. Bancorp sees its 2nd downgrade in two days. Others: Fifth Third (NASDAQ:FITB), First Republic (NYSE:FRC), Citizens Financial (NYSE:CFG), Capital One (NYSE:COF), Zions Bancorp (NASDAQ:ZION), KeyCorp (NYSE:KEY), Webster Financial (NYSE:WBS), NBT Bancorp (NASDAQ:NBTB), Sterling Bancorp (NYSE:STL), First Connecticut (NASDAQ:FBNK), Regions Financial (NYSE:RF)
Alongside valuation-related downgrades of Huntington Bancshares, Comerica, and Regions Financial, FBR's Steve Moss cuts BB&T (BBT -0.2%), LCNB (LCNB -1%), Pacific Premier (PPBI -2.7%), and Zions Bancorp (ZION -0.5%) after their nice runs higher.
All were downgraded to Market Perform from Outperform.
Alongside an earlier-reported downgrade of Regions Financial (to Outperform from Strong Buy), Raymond James also downgrades Zions Bancorp (ZION -0.6%) to Market Perform from Outperform.
As with Regions, the Zions call has been a good one, with the stock higher by 16% this year, far outpacing the regional bank index.
PNC Financial (PNC -0.1%) is upgraded to Market Perform from Underperform - another good call as PNC's 4% decline this year has lagged peers.
Turning to some smaller players, United Community Banks (UCBI +1.5%) is boosted to Strong Buy from Outperform. Park Sterling Bank (PSTB -0.6%) is cut to Market Perform from Outperform following its nice run higher. Bancorp South (BXS -0.9%) is cut to Underperform thanks to earnings uncertainty around the closing of two pending acquisitions.
"Large banks are going to be forced to take on more capital," says Dick Bove. "It will make the cost of funding more, not less, expensive. It will reduce the appeal for investors to put money at risk in the banking system."
Bove is commenting on a weekend announcement from Fed Governor Daniel Tarullo promising future stress tests will be geared to demanding even higher cash buffers for banks. Set to take effect next year, the new rule could raise capital requirements for the largest banks by 3 or 4 percentage points, writes Jeff Cox at CNBC.
There's good news though, as those lenders with less than $250B in assets won't be subject to the same standards. FBR's Edward Mills calls it a "significant positive" for regionals, which now have more certainly on the process, reduced regulatory expenses, and thus the ability to return more capital to owners.
Noting progress on the expense control front, analyst Jill Shea boosts the price target on Outperform-rated Zions Bancorp (ZION +0.3%) to $36 from $32 (current price is $30.02). "Given that rates have not provided earnings support, we think greater urgency has been placed on controlling costs."
Shea sees an improvement to 8.3% ROTCE by the end of next year, and 9.1% by year-end 2018 - this without the benefit of higher interest rates.
It's no surprise that yield-starved financials are expected to be a big beneficiary of higher base rates, but the team at Goldman has six that stand to gain the most.
Bank of America (NYSE:BAC), BNY Mellon (NYSE:BK), Citizens Financial (NYSE:CFG), Regions Financial (NYSE:RF), Schwab (NYSE:SCHW), and Zions Bancorp (NASDAQ:ZION) make the cut.
Goldman sees an average 46% upside to normalized earnings for the group if rates go back to 3% (a long way off for even the most hawkish).
Used to low and slow as far as rate hikes go, investors may be overlooking the potential for even one Fed move this year to be a positive catalyst. The team suggests taking a look at 6-month and 12-month calls on their recommendation list.