INSUBCONTINENT EXCLUSIVE:
By Lu Wang and Felice MaranzTime may heal all wounds
But the decade since the collapse of Lehman Brothers Holdings Inc
hasn’t been long enough to restore investors’ faith in banks.
While this week marks the 10-year anniversary of the Lehman bankruptcy, an
event seen widely as a catalyst for the global financial crisis, data on stock prices and fund positioning suggests the aversion to the
banking industry hasn’t gone away.
Down 8 percent from their 2007 peak, financial stocks are the only major group in the SP 500 Index that
has yet to fully recover from the bear market
Money managers are shunning the industry
Banks were the most-avoided industry among hedge funds at the end of June, while mutual funds cut their holdings to a five-year low, data
compiled by Goldman Sachs showed.
“How many out there are pumping for Bank of America versus Netflix” said Jerry Braakman, chief
investment officer of First American Trust in Santa Ana, California
“It’s probably been a lost decade for banks as far as sentiment goes.”
Banks have seen their importance waning in the market as the SP
500 rallied on to trade 80 percent above its 2007 peak
Once the biggest industry making up more than one-fifth of the market, financials have now fallen way behind technology
The carve-out of real estate in 2016 certainly hurt, but that only explained a fraction of the current 12 percentage-point gap to
tech.
Blame the underwhelming performance on regulations and the weakest economic recovery from a recession since World War II
While the requirements on shedding risky businesses and holding more liquid assets have made lenders better equipped to withstand financial
Meanwhile, loan growth has stayed muted and interest rates stuck near record lows, giving bears reason to shy away.
“We didn’t
anticipate that things would be as bad as they turned out to be,” said Phil Orlando, chief equity market strategist at Federated Investors
“We didn’t think it would take this long for the Federal Reserve to get to a normalized policy
The abnormally low interest rates orchestrated by the Fed probably inhibited the ability of financials to generate profits.”
At the start
of the third quarter, hedge funds tracked by Goldman Sachs had 10 percent of their assets in financial stocks, 4.5 percentage points below
the group’s representation in a benchmark.
After favoring banks in 2017 in a clash with hedge funds, managers of mutual funds are now
joining the fray to dump them
Relative to the market, the industry’s average weighting in portfolios dropped by 1.1 percentage points over the second quarter, the
biggest decline among 11 sectors.
The skepticism is at odds with the industry’s improving fundamentals, according to to Mike Mayo, a
banking analyst at Wells Fargo
The past 10 years has marked a U-turn for banks in everything from capital and cost control to aligning executive compensation with
The end result: the lowest earnings volatility in a generation, he said.
“The mantra has moved from ‘grow, grow, grow’ to phrases such
as ‘responsible’ and ‘sustainable’ growth,” Mayo said
“As long as investors mention the financial crisis, it creates opportunity.”
Thanks to tax cuts, banks and insurers are forecast to
boost profits by 26 percent this year, roughly in line with the SP 500
Yet measured by revenue, its 4.8 percent expected growth trails all other industries but utilities and consumer staples, analyst estimates
compiled by Bloomberg show.
Trading at 16 times profits and 1.6 times book value, financials are ranked at the bottom of the pack in the SP
But at a time when growth is all the rage, being cheap is not good enough.
“The industry has lost stature,” said Jack Micenko, a banking
analyst at Susquehanna International Group LLP
“It’s similar to what you see today from MBA graduates
They are opting for tech companies more than Wall Street compared to 10 or 15 years ago.”
