Oppenheimer Bank Analysts Have Trouble Sleeping Because Of These Risks

In a new report, Oppenheimer analyst Ben Chittenden attempted to tackle the question of whether bank stocks have already priced in downside from a recession scenario or whether they are still at risk of further declines.

Chittenden acknowledged that Oppenheimer doesn’t have all the answers, but the firm does believe that the banks have some tough waters to navigate over the next 12–18 months.

“There is reason to believe loan growth will slow, credit costs are moving higher and earnings expectations probably need to be reset,” Chittenden explained.

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While bank stocks are already down about 20 percent in 2016, he feels that most names are still at risk of further underperformance. Banks are currently trading at about 10–14x 2016 downside EPS levels, which Chittenden admits is “not expensive by any means.” However, he believes that current prices do to account for all the potential risks.

In addition, regardless of valuations, it will be difficult for bank stocks to outperform in the face of a wave of downside earnings revisions.

Chittenden noted that one silver lining to the downturn could be that M&A activity will pick up in the space.

Oppenheimer maintains Outperform ratings on Citizens Financial Group Inc (NYSE: CFG) and Fifth Third Bancorp (NASDAQ: FITB).

Disclosure: The author holds no position in the stocks mentioned.

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