Banking Sector Valuations Looking Better as Fed Hikes
Although the most rate-sensitive banks look fairly valued today, we see more opportunities in the broader sector today than at the start of the year.
As expected, the Federal Open Market Committee voted to raise its target rate range on Wednesday.
The vote was unanimous as economic data remains positive for the U.S., with unemployment remaining quite low, household spending and business investment remaining constructive, and real GDP growth expected to be above 3% for 2018.
Notably, the committee removed language from the statement about the stance of monetary policy being accommodative. This suggests to us that the Fed is getting closer to what it views as a neutral rate in the current environment. Still, the market is expecting another hike at the December meeting and two more next year.
In terms of the impact on the banking sector, the most rate-sensitive names we cover are Comerica and M&T, but we believe the market largely understands this and view the names as fairly valued.
Instead, we still see value in Wells Fargo, given the pessimism and poor headlines continuing to plague the bank. Further, with banks in general simply treading water for 2018, we are beginning to see our broader coverage universe as more fairly valued than we did at the start of the year.
Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.