(Reuters) - Ten years after JPMorgan (JPM.N) bought failing investment bank Bear Stearns, one of the first big harbingers of the financial crisis, investor views on U.S. banks are significantly brighter, although the sector may have already put its biggest gains behind it.
JPMorgan initially announced its bid of $2 per share for Bear Stearns on March 16, 2008 when the Wall Street bank was on the brink of collapse due to its exposure to toxic mortgage bonds and a draining of its cash reserves after customers fled as the subprime mortgage crisis intensified.
Fast forward ten years and U.S. bank balance sheets are much healthier as post-crisis regulations such as the Dodd-Frank Act of 2010 forced banks to be more transparent and led them to shore up reserves and make less risky bets.
The S&P 500 bank stock index .SPXBK shows gains for six of the last 10 years, including 20 percent gains in each of the last two years, as investors piled in for a piece of the profit expansion they expected from tax reform, rising interest rates and deregulation.
(GRAPHIC: Yearly Percent Changes: S&P 500 vs S&P 500 Banks - reut.rs/2FAAGOG)
But now some analysts and investors are questioning how much further the sector can rise as they watch loan growth, rising credit losses and worry about an acceleration in the pace of Federal Reserve interest rate hikes.
“There’s a lot priced into the banks at this point,” said Jeff Morris, head of U.S. equities at Aberdeen Standard Investments in Boston citing bets on tax reform, deregulation and up to three U.S. interest rate hikes in 2018.
“To propel the bank stocks from here you need more of the same. You need additional signs of regulatory reform. You’d also need to see higher interest rates and more in the way of loan growth,” said Morris. “In loan growth we haven’t seen much acceleration since the tax plan and the banks themselves aren’t talking about seeing a real acceleration in loan growth.”
Bank loans and leases grew 3.2 percent in 2017 compared with a 6.5 percent rise in 2016 and the growth rate had dipped to 2.7 percent by February, according to the Federal Reserve data.
JPMorgan has come the furthest of the S&P bank stock index constituents with a price increase of 215 percent since March 14, the last trading day before its Bear deal was announced.
Its shares are now trading at 12.7 times forward estimates compared with 12.5 for the broader bank sector and 17 for the benchmark U.S. S&P 500 stock index. In comparison JPMorgan’s price earnings ration was 10.7 around the time of the Bear deal while the sector was valued at 12.3 and the S&P 500 had a multiple of 13.