May 7, 2021

DealBook: The Trouble With Financial Stocks

Sell now — ask questions later.

That appears to be the mind-set of many nervous investors when it comes this week to financial stocks, which are down more than the broader market. Goldman Sachs is down almost 12 percent since Monday’s open. Morgan Stanley and Bank of America are both down roughly 17 percent. Citigroup dropped 15 percent and JPMorgan Chase shares sank almost 9 percent.

Some market insiders feel the sell-off is overdone. Bank executives are grumbling about it. There is nothing systemic seemingly going on here, they say. In some cases, banks have record-high capital levels thanks to recent regulatory rules requiring them to put up more capital against riskier businesses. Leverage, or how much money a firm borrows to fund its business, is down significantly since the financial crisis. An optimist may even argue these stocks are a screaming buy right now. All of the country’s biggest financial stocks are trading below book value, or crucial financial measure that refers to the liquidation value of a company’s assets if it were forced to sell everything.

So what gives? No one cares about all that right now.

“What you are seeing is the manic ‘I remember 2008’ selling,” said Glenn Schorr, a banking analyst with Nomura. “And the only thing that worked then was to get out of the way and not come back too early. The more cash they have, the safer people feel right now.”

Holders of financial stocks, burned by what happened in 2008, don’t want to stick around and see how this latest bump in the road ends, especially given the questions surrounding bank exposure to Europe, continued litigation stemming from the credit crisis and the potential impact of a possible recession, which threatens to crimp big money makers for the banks, including M.A., underwriting and beyond.

Mr. Schorr said while most banks have stated they have bought protection to hedge against their exposure in Europe, bank investors are worried it may not matter. “There may be a voluntary restructuring instead of an actual bankruptcy so the protection they have bought might not pay off,” he said.

Richard Bove, an analyst with Rochdale Securities, is downright pessimistic, saying concerns over Europe and litigation are just a symptoms of larger problem, one that is systemic.

“This is a continuation of 2008,” he said. “We are finally coming to grips with the fact we have a massive debt problem that needs to be dealt with. This is not a problem for our grandchildren. It is our problem. We have a financial system structured on a bankrupt currency and that system is now breaking down and a new system will arise to replace it, but we don’t yet anything to replace it. “

Mr. Bove said recently moved all his holdings into cash.

While everyone’s hair seems to be on fire this week, major players including Fidelity, Wellington Management and AllianceBernstein have been big sellers of financial stocks for months now, regulatory filings show. This selling points perhaps to another concern about these stocks. Financial firms, with lower leverage levels and more rigorous capital requirements, simply won’t be able to generate anywhere near the returns they did before the financial crisis. Goldman’s return on equity was just 8 percent in the second half of this year, down from more than 30 percent in 2006.

Banks argue that big shareholders are always selling in and out of their stocks. This week’s hubbub aside, the selling by some of these long-term holders suggests that concerns run deep. And even though the country’s banks are well capitalized and have significantly lowered their leverage levels since the crisis, it may be some time before investors wade in again.

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