Nearly three out of four
That's according to the results of a new survey by Piper Sandler. The investment bank and research firm sent its annual survey to 593 investor clients over the summer — with a 12% response rate — and found 73% believe bank stocks, down about 15% this year, should have room to roam higher later this year and into next.
"We're definitely seeing bullishness," Mark Fitzgibbon, head of research in Piper Sandler's financial services group, said in an interview.
Still, he said, headwinds linger.
The two biggest risks that investors see ahead for the bank group are credit quality (44%) and higher interest rates (38%). The two challenges are interwoven. The Federal Reserve boosted rates 11 times since early 2022 to
The Piper Sandler survey found that the regulatory burden followed at 12% in terms of investors' views of the most notable risks to the banking industry. Despite regional bank failures earlier this year that were hastened by deposit runs, only 5% of investors cited liquidity as their biggest concern. Just 1% named cybersecurity. These collectively amounted to less than half of the percentage of investors worried about credit quality.
To date, banks' loan books on the whole have held up well. Commercial real estate charge-offs did increase in the second quarter, jumping fourfold from a year earlier to $1.17 billion across the U.S. banking industry, according to S&P Global data. Office properties, in particular, are under pressure in urban areas due to enduring remote work trends. Yet, overall loan losses remain near historical averages and the vast majority of banks maintained steady profitability through the first half of 2023.
Fitzgibbon said credit quality is bound to at least shift from "good to less good" through 2023, and it could worsen more substantially if a full-blown recession develops in the coming year.
Looking ahead, though, the survey found that investors are bullish on banks, with 33% expecting stocks in the sector to rally up to 10% over the next 12 months, and another 27% anticipating a 10% to 20% increase. A fourth of those surveyed think bank stocks could surge more than 20%. Only 15% see bank stocks losing ground.
Recession fears tied to high rates also have weighed down bank stocks in 2023. But the Piper Sandler survey found that 91% of respondents believe that either a mild or severe recession is already reflected in bank stocks, meaning further downside from an economic downturn is unlikely.
"And so far this year, the economy keeps growing," Mike Matousek, head trader at U.S. Global Investors, said in an interview. "I don't think a recession should be a foregone conclusion."
Indeed,
A robust job market has propelled the economy. Hiring numbers have varied widely by month this year, from more than 400,000 hires in January to about 105,000 in June, according to the Labor Department. But six-figure monthly gains have proven the norm, and the unemployment rate, at 3.8% in August, was near a 50-year low.
These are conditions that typically put consumers in sound financial health and, by extension, empower borrowers to make loan payments on time and in full.
Piper Sandler's Fitzgibbon, however, said bankers that his firm covers are anecdotally reporting increased stress in their CRE loan portfolios, especially those with high office property exposure.
"So at least for a couple quarters, I do think we are going to see higher credit costs," he said. "Will it get a lot worse or just a little? Time will tell."
