Posted by & filed under Banking, Investing, White Papers/ Thought Pieces.

Contributed by FJ Capital Management

In this white paper, we discuss major market cycles for bank stocks which have not traded as cheaply since the Great Financial Crisis (GFC) that ended in July of 2009, due to their cyclical business models tied to ebbs and flows of the economy. We furthermore conclude, that after a sharp move down in reaction to the COVID‐19 pandemic, banks may have begun a large, multi‐year bull market move, particularly as peak loan losses(a buy signal) may have already taken place.

This conclusion is based on our examination of bank stocks in relation to the end of each major recession in recent decades. In each case, recessions triggered sharp downturns in bank stocks that typically cut valuations in half.

Subsequently, these stocks began a powerful multi‐year bull market five months before the end of each recession and generated a median return of 353%.

The amount of fiscal and monetary stimulus supplied in response to COVID‐19 is unprecedented and on a scale that is many times larger than what was provided in the GFC. The efforts to backstop the economy also serve as backstops to the banking industry. Banks are being utilized as an important part of the fiscal solution in this recession, as they earn millions of dollars in fees by making government grants to small businesses via the government’s Small Business Association lending program. These fees help offset cyclical loan losses, while loan losses should be further mitigated by monetary and fiscal support.

Furthermore, bank regulators have given banks flexibility to give their borrowers leeway in making timely loan payments, recognizing that loan workouts can significantly reduce economic damage caused by lower economic activity during the pandemic.

In summary, we believe the large investable universe of bank stocks and historically low valuations create a compelling investment opportunity in the banking sector, with an attractive ratio of risk versus reward for long‐term investors. Consolidation and operating leverage, the two major structural trends for small‐ and mid‐cap banks, remain intact, albeit halted during this pandemic.

Download the white paper

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