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Banks Soar as Goldman Calls Stocks Attractive After Plunge (1)
LAGOS (Capital Markets in Africa) – Banks rallied on Friday morning after Goldman Sachs said stocks were starting to appear attractive after a 41% sell-off, with investors accounting for lower interest rates and a much higher probability of recession.
Morgan Stanley pared a gain of as much as 11% in early trading, it was the biggest gain intraday since 2011. U.S. Bancorp also pruned back from a 10% jump, the most since 2009. Other bank stocks rose too, with Bank of America Corp. and JPMorgan Chase & Co. adding as much as 10%, and Citigroup Inc. rising 12%.
Banks rose along with the broader market recovery after the worst Wall Street session since 1987. Investors watched for moves from the Federal Reserve, House Speaker Nancy Pelosi said she’s near an agreement with the Trump administration on a plan to mitigate some of the economic blows from the coronavirus outbreak, and the Trump administration announced new steps to speed virus testing. Yields on 10-year Treasuries rose about 16 basis points to 0.963%.
Ramsden estimated that 95% of a corporate recessionary scenario, which would reduce earnings by 47%, is already priced into bank valuations. If a broader recession were to strike companies and consumers, his analysis shows an average 54% hit to consensus earnings estimates; he sees the market as now discounting roughly 85% of that scenario. Morgan Stanley and U.S. Bancorp screen the cheapest for recession, while PNC Financial Services Group appears the most at risk, he said.
He added that the short-term risk to earnings from lower oil prices is modest, as oil and gas loans represent only 2% of total loan books. But, layering in a 5% incremental reserve build on loans to industries likely hardest by the coronavirus — transportation, leisure, metals, mining and materials — may lead to a total earnings-per-share drop of 9%.
The KBW Bank Index rose as much as 7.3% on Friday morning. On Thursday, the index fell 10% to close at the lowest since July 2016 as concern about the spread of the coronavirus and its impact on the global economy intensified, spurring fears of liquidity and credit crises.