The Federal Reserve’s hawkish remarks on Wednesday has led at least one analyst to take a negative view on bank stocks.
After the Fed signaled future interest-rate hikes may be ahead, Odeon Capital analyst Dick Bove said in a note to clients Thursday that he is returning to a stance he has mostly held for two years. In the past couple of months, his negative “view began to wobble” as bank shares bounced from their lows.
“The outlook for banking remains stressed,” Bove wrote. “Even though banks are not expected to fail ‘en masse,’ and a sizable liquidity crisis may not develop, real bank equity is headed lower, bank earnings are troubled and the specter of a major increases in loan losses is a real threat – particularly in consumer financial products.”
Bank stocks sank Wednesday, lagging the broader market, after the Fed paused rate hikes but indicated further increases are ahead. On Thursday, the sector joined a broader market rally.
The sector was pummeled earlier this year amid the collapse of four regional firms, sending the KBW Bank Index to its lowest level since September 2020 last month. The gauge has since rallied about 14% off that low amid a streak of weekly gains.
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“I continue to believe that bank preferred and debt securities offer some protection in this environment but that bank common equities should be avoided,” he said in the note.
Bove is taking what “the Fed says at face value,” he wrote.
The analyst expects the central bank to continue to lift rates to battle ongoing inflation until economic conditions deteriorate and the job market weakens.
“Continued high rates mean that banks must fight to hold on to deposits,” Bove wrote. “Weak deposit flows means fewer loan originations. A pause in economic growth suggests that loan losses are likely to increase.”
--With assistance from Will Daley.
(Updates shares throughout to market close.)
