Against the backdrop of solid loan growth, strong financial position with near-record levels of capital, improved underwriting standards and a continuation of merger and acquisition (M&A) activity when the economy reopens, US banking sector has revealed its long-term growth potential and attractive valuation. Absent a prolonged economic slowdown, we remain optimistic for the sector as US banks have shown the resiliency of their business model as they continue to support their customers through the global health crisis. US banks are part of the solution today, which contrasts vastly with their role during the global financial crisis.
In today’s environment, banks started to build loan loss reserves for possible future loan losses related to the global health crisis. When the economy begins to grow again, we believe US banks should see faster normalisation of earnings. Revenue and loan growth may hold up better in today’s environment as banks provide support to their customer’s borrowing needs.
US banking industry: Total loans (USD billions)1
While loan loss provisioning and net charge-off are expected to increase as a result of the global health crisis, we believe the strength of the US banking system today enables banks to be part of the solution to support business and customers.
US banking industry: Excess capital levels2
We believe the current environment is conducive to M&A activity. The consolidations not only unleashed values of the acquired banks, with a direct impact on boosting stock prices, but also create synergies to the acquiring bank with a sizable reduction in operating costs.
US banks: continued consolidation3
US banking industry valuation is trading below its historical average today, with the price-to-book ratio hitting the lowest since 2011 and near levels during the global financial crisis. Historically, periods of heightened volatility have provided opportunities to purchase higher quality banks with above peer profitability at attractive valuations.
US banking industry: Price-to-Book Ratio4
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80% of assets6
in regional banks