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The Fed's relaxed monetary policy does not bode well for bank profits. And a new report by Keefe's analyst, Bruyette & Woods, Frederick Cannon, sets a much more horrifying scenario if the United States approaches the negative-rate environment of other developed economies.
Cannon's report was released on September 25 and included price / earnings ratios based on KBW's profit estimates for 2021, as well as another set of P / E ratios based on a scenario in which the federal funds rate went from 0% to 0.25% by the end of 2020 and 10-year US Treasury yield
TMUBMUSD10Y, -2.25%
"Becomes negative" in the third quarter of 2020.
Although the negative returns in the US may still look good, it is important to keep in mind that the federal funds rate target was between 0% and 0.25% for the period seven years up to December 16, 2015. We can easily go back. and if demand for US dollars continues to be strong, negative bond yields at 10 years might even be likely unless significant strengthening of the economy forces the Fed to change direction again.
Cannon also analyzed another scenario combining low rates and a recession. But in this article, we are only interested in the numbers from the negative interest rate scenario, leaving aside a recession.
Negative interest rates would not only affect banks, they would also affect most financial services companies whose profits depend on the gap between what they pay for funding and what they are. They earn with loans. Charles Schwab
SCHW, -2.18%,
the pioneer discount broker who is technically a savings and credit holding company is an excellent example. The company announced this month that it would cut 600 jobs, CEO Walt Bettinger citing falling interest rates.
According to Schwab's income statement for the second quarter, net interest income totaled $ 1.61 billion, or 60% of total net revenues. Schwab shares are trading for 16.2 times the current estimate of KBW earnings per share for 2021, but for 41.8 times the estimate of 2021 BPA in the 'rate scenario'. "negative interest" of the company. one dollar per share of $ 2.58.
Here is the universe of the 20 financial services companies of the KBW coverage universe whose earnings forecasts would decrease the most in the negative interest rate scenario of the company:
| Company | Teleprinter | Closing price – September 25 | KBW's current estimate in 2021 by KBW | KBW earnings per share estimate for 2021 in the negative interest rate scenario | KBW Earnings Per Share Estimates for 2021 Decline Under the Negative Interest Rate Scenario | P / E – current BPA estimate for 2021 | P / E – estimate of scenario 2021 EPS |
| Charles Schwab Corp. |
SCHW, -2.18% |
$ 41.80 | $ 2.58 | $ 1.00 | 61.2% | 16.2 | 41.8 |
| E-TRADE Financial Corp. |
ETFC, -4.81% |
$ 44.12 | $ 3.90 | $ 1.85 | 52.6% | 11.3 | 23.8 |
| SVB Financial Group |
SIVB, -3.74% |
$ 214.05 | $ 17.00 | $ 10.50 | 38.2% | 12.6 | 20.4 |
| CIT Group Inc. |
CIT -0.99% |
$ 45.68 | € 5.01 | $ 3.12 | 37.7% | 9.1 | 14.6 |
| TriState Capital Holdings Inc. |
TSC, -2.76% |
$ 21.71 | $ 2.16 | $ 1.35 | 37.5% | 10.1 | 16.1 |
| ProAssurance Corp. |
PRA -0.35% |
$ 40.67 | $ 0.79 | $ 0.51 | 35.4% | 51.5 | 79.7 |
| Interactive Brokers Group Inc., Class A |
IBKR, -0.43% |
$ 51.73 | $ 2.42 | $ 1.56 | 35.5% | 21.4 | 33.2 |
| Comerica Inc. |
CMA, -0.79% |
$ 65.50 | $ 6.98 | $ 4.59 | 34.2% | 9.4 | 14.3 |
| BanCorp Zions. N / A. |
IF WE, -0.92% |
$ 44.37 | $ 4.40 | $ 3.09 | 29.8% | 10.1 | 14.4 |
| M & T Bank Corp. |
ATV, -0.22% |
$ 157.24 | $ 14.63 | $ 10.36 | 29.2% | 10.7 | 15.2 |
| Citizens Financial Group Inc. |
CFG, -1.24% |
$ 35.60 | $ 4.05 | $ 2.90 | 28.4% | 8.8 | 12.3 |
| Metropolitan Bank Holding Corp. |
MCB -0.96% |
$ 40.82 | $ 5.26 | $ 3.80 | 27.8% | 7.8 | 10.7 |
| Merged bank |
AMAL, -0.37% |
$ 16.16 | $ 1.60 | $ 1.16 | 27.5% | 10.1 | 13.9 |
| Fifth Third Bancorp |
FITB, -0.98% |
$ 27.66 | $ 3.24 | $ 2.35 | 27.5% | 8.5 | 11.8 |
| East West Bancorp Inc. |
EWBC, -2.96% |
$ 45.60 | $ 4.60 | $ 3.40 | 26.1% | 9.9 | 13.4 |
| Western Alliance Bancorp |
WAL, -1.74% |
$ 46.53 | $ 4.45 | $ 3.30 | 25.8% | 10.5 | 14.1 |
| Huntington Bancshares Inc. |
HBAN, -0.80% |
$ 14.37 | $ 1.28 | $ 0.95 | 25.8% | 11.2 | 15.1 |
| UMB Financial Corp. |
UMBF, -1.67% |
$ 65.82 | $ 4.25 | $ 3.20 | 24.7% | 15.5 | 20.6 |
| Wintrust Financial Corp. |
WTFC, -1.72% |
$ 65.61 | $ 6.05 | $ 4.55 | 24.8% | 10.8 | 14.4 |
| Provident Financial Services Inc. |
PFS -2.06% |
$ 25.22 | $ 1.59 | $ 1.20 | 24.5% | 15.9 | 21.0 |
| Sources: Keefe, Bruyette & Woods, FactSet | |||||||
The much higher P / E ratios for many of these companies underscore just how bad the negative interest rate scenario could be. And these numbers do not even reflect the possibility of a recession with negative rates.
Here are the same data for the "big six" American banks:
| Company | Teleprinter | Closing price – September 25 | KBW's current estimate in 2021 by KBW | KBW earnings per share estimate for 2021 in the negative interest rate scenario | KBW Earnings Per Share Estimates for 2021 Decline Under the Negative Interest Rate Scenario | P / E – current BPA estimate for 2021 | P / E – estimate of scenario 2021 EPS |
| J.P. Morgan Chase & Co. |
JPM, -0.82% |
$ 118.00 | $ 10.70 | $ 9.83 | 8.1% | 11.0 | 12.0 |
| Bank of America Corp. |
LAC -0.41% |
$ 29.25 | $ 3.08 | $ 2.75 | 10.7% | 9.5 | 10.6 |
| Citigroup Inc. |
VS -0.39% |
$ 69.38 | $ 8.40 | $ 7.75 | 7.7% | 8.3 | 9.0 |
| Wells Fargo & Co. |
WFC -0.79% |
$ 49.26 | $ 4.40 | $ 3.94 | 10.5% | 11.2 | 12.5 |
| Goldman Sachs Group Inc. |
GS -0.86% |
$ 210.03 | $ 25.75 | $ 25.39 | 1.4% | 8.2 | 8.3 |
| Morgan Stanley |
MRS, -0.98% |
$ 43.04 | $ 5.35 | $ 4.99 | 6.7% | 8.0 | 8.6 |
| Sources: Keefe, Bruyette & Woods, FactSet | |||||||
It's fascinating to see that even in the negative interest rate scenario, the valuations of the price-earnings ratio of the largest banks would not be much higher.
Do not miss: A bond fund that earns more than 5% – how aggressive managers offer additional returns
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