Banks stay under pressure until the rate outlook settles, says Keefe, Bruyette & Woods (KBW) CEO Tom Michaud. Bank stocks have given back 10 percentage points of relative performance since July 15, before third-quarter (Q3) bank earnings season.
Yet he argues the selloff reflects rate nerves, not weakening fundamentals. Big-bank earnings start next week.
Why Are Rates Outweighing Fundamentals This Q3 Bank Earnings Season?
The 10-year Treasury yield touched about 5.35% this week, its highest since 2002. This comes as JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo report on October 13.
Michaud said KBW, an investment bank focused on financial companies, used artificial intelligence (AI) to scan second-quarter earnings transcripts. Mentions of net interest margin, the gap between loan income and deposit costs, ran 60% above the prior three-year average.
A regression analysis then found forecast changes in that margin correlated most closely with bank stock performance.
Still, Michaud personally considers the rate worries overdone.
Meanwhile, insider buying in financials has thinned, with the number of executives purchasing shares near a 23-year low.
Michaud expects third-quarter investment banking profits to rise about 10% year over year, helped by a private equity backlog.
“The industry still feels like business is good. It can’t be a record every quarter.”
Tom Michaud, president and CEO of KBW, on CNBC’s Squawk on the Street.
Could Bond Marks Slow Bank Buybacks?
Michaud added that KBW’s trading desk is hearing renewed concern about bond markets and interest rates, as in 2023.
Unrealized bond losses equaled 19% of industry tangible capital, or equity minus goodwill, in 2023. Last quarter, they were 5%, he said.
Those marks may slow buybacks at some banks. The largest banks have already optimized capital. In contrast, regional banks hold more excess and need not slow down.
KBW modeled 200 banks through 2028. It projects tangible common equity, a core capital cushion, near 10% by then, versus 6.5% before the global financial crisis.
However, Michaud expects one-off credit problems after years of near-zero credit costs. The question is whether they turn systemic.
Return on tangible capital, KBW’s best long-term fit for bank valuations, is improving and sits in the high teens.
