“Large banks remain inexpensive in a market focusing more closely on stretched valuations. Although a return to the pre-financial crisis valuation high is not expected, the BKX was trading at 1.76x tangible book value in the week ended June 9, and had recently crossed above the post-financial crisis highs before settling back to hold the old highs established between 2014 and 2015,” said PowerShares in a recent note. “It has been trading at a near 50% discount to its pre-financial crisis price-to-tangible-book ratio of 3.51. In contrast, the S&P 500 Index was trading at 8.78x tangible book value and trading 35.6% above the Oct. 2007 pre-financial crisis valuation high.”
With a steepening yield curve or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long. Although the Fed unveiled its second rate hike of 2017 earlier this month, the central bank’s dovish tone punished regional bank stocks and ETFs.
“There is a chance for bank valuations to expand as the regulatory environment eases. The Treasury Department’s banking regulation plan released June 12 appeared to be well-received by Wall Street analysts, stoking hopes that banks might be able to more efficiently utilize their balance sheets and improve returns on capital. Moreover, the Treasury Department’s plan came on the heels of the House of Representatives passing the Financial CHOICE Act, which is a roll back of the Dodd-Frank financial regulations,” according to PowerShares.
For more information on the banking sector, visit our financial category.