The problem with the banks is this: they are getting expensive!
People buy banks in an improving economy because it's double levered: you get higher rates and higher loans. However, we already arrived at an expensive price, without actual growth.
While the biggest banks are still relatively cheap, regional banks are no bargains! PNC is trading around 12 to 13 times forward earnings, USB is at 13-14 times, some like Comerica are even higher, almost 16. These are close to pre-financial crisis multiples.
The problem is, people are are paying more to get less. They are making less money on a dollar to dollar basis, but they are being valued the same. So the market is either over-optimistic about the recovery, or the multiples have to correct. What we need is very simple: either an increase in loan growth, or higher interest rates.
1) loan growth. For the most part, banks are talking roughly 4 to 6 percent loan growth year over year, or roughly 1 to 2 percent growth quarter over quarter.
Loan growth at USB was respectable, up 1.9 percent sequentially, while PNC reported 1.3 percent growth. Is that good enough? It's decent, but it needs to get better, perhaps somewhere in the range of 8 to 10 percent annually, and 2 percent plus quarter over quarter, at least.
2) higher rates. Banks need short-term rates to rise, so they can charge more for things like adjustable rate mortgages. Those are the kind they keep on the books. No one is keeping 30-year loans at 4 percent on their books.
They don't expect much: PNC CEo William Demchak sai he expects a "continuation of the low interest rate environment."
Bottom line: fundamentals need to catch up with valuations.