Bank Director26 May 2024 20:15
The coming year, with a contested general election, more geopolitical turmoil and other wildcards, promises to be especially intriguing. How might things play out? Below, we lay out three possible directions.
The base case is better than what bankers experienced in 2023 but still meh: The Fed cuts rates three, maybe four times in 2024, bringing short-term rates more in line with long rates, normalizing the yield curve. The benefits of those cuts are balanced by a modest recession that dents the repayment abilities of consumers and small businesses.
Bank valuations rise modestly, led by institutions that the public market perceives as having more resilient business models. “You have a mild recession, maybe a little stagflation, but it’s not the end of the world and you’re set for a rosier 2025,” Moss explains.
In the bull case, inflation rates decline and the economy slows gradually—but not enough to generate a meaningful recession. The Fed lowers rates as many as six times, and the yield curve takes on a more traditional look.
Improving margins, stable asset quality and surging profits appeal to the generalists, driving valuations higher. “In that scenario, banks make more money and bank stocks go from the 8.5 times earnings they’re trading at today to 12 times earnings,” Fitzgibbon says.
The bear case has several possible permutations, none of them encouraging. In one version, the Fed’s tightening overshoots its mark, and the resulting recession causes non-performers and charge-offs to rise in sensitive areas such as consumer lending and commercial real estate. “If you have to raise your loan-loss provision from 30 basis points to 80 or 90 basis points, your stock might drop 20% and your earnings could fall 40%,” says Jeff Davis, managing director at Mercer Capital.
Sign In
Follow the stocks
