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Key Takeaways From Banks' First-Quarter Earnings

We're maintaining our call on the U.S. banks and will know a lot more by the second quarter.

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The traditional U.S. banks we cover have finished reporting first-quarter results, and we have a lot more information than we did heading into earnings season. This remains an extremely difficult situation to analyze. Nobody knows exactly how the coronavirus and the economy will develop, and nobody knows what future credit losses will be. Even so, after reviewing the latest disclosures and rerunning our scenario analysis, we still think the traditional U.S. banks are undervalued. While much of the market has generally recovered to some degree, many of the banks have not. In a market where bargains are more difficult to find than several weeks ago, we think the banks are still worth considering.

As we argued in our previous piece, we think today's valuations are a debate about capital adequacy, not about earnings per share for the next quarter or year. We still calculate that something worse than the U.S. Federal Reserve's severely adverse stress test scenario would have to occur for today's valuations to make sense. As such, we think the odds of superior returns for investors at today's valuations are still constructive. Nobody knows exactly what credit losses will look like in the future, or how long the COVID-19-related lockdowns and economic downturn will last, which makes investing in the banks tough. The risks are real, but on a probability-adjusted basis, we think many of the banks offer an attractive margin of safety today.

Eric Compton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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