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This time last year the US bank sector was in turmoil, including the third largest failure in its history. There were extenuating circumstances in the individual failures, but bank runs were set off after the banks suffered losses on a variety of assets, including US Treasury and agency bonds. Regulators and government took early and material action to backstop sector liquidity. During the turmoil, we took the view that the issues were not systemic. But certainty only comes in retrospect.
How have the banks and their shareholders fared since then? There has been an increase in their cost, but sector deposits troughed in April 2023, as shown in the chart below. It hasn’t been smooth and there has been a wide range of outcomes to date (and there’s still more to work through), but at the index level (which is biased to larger banks), shareholders have recovered their losses and more. The S&P 500 Banks index has underperformed the S&P 500 (like almost everything else), but the gap is narrowing.
From here, assuming the US economy continues to grow near trend, we’d expect the banks should perform well. Earnings forecasts may have troughed, valuations are modest, and there’s the potential for excess capital returns/deployment once some regulatory matters are finalised. Nonetheless, we hold a neutral position in the US banks; we see better upside elsewhere in cyclicals particularly given the risks inherent in the banks.
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