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While bank stocks have rebounded from a tough start to the year, analysts expect shadow banking shares to bounce back in a big way from recent losses.
Nonbank lending businesses including student and auto loans and mortgage finance could be counted upon by investors for better returns after disappointing in 2015, a Keefe, Bruyette & Woods report notes. It could also mean a big rebound for online lenders, which have seen their stocks impacted from sector-specific volatility this year.
"Since the beginning of 2015 shadow banking stocks are down more than 17.5 percent, compared with a 4 percent decline for overall financial stocks and a 9 percent decline for universal banks," analysts wrote in the report.
After an ugly run for shadow banking businesses, factors supporting a rebound by these financial services companies include the market's adjustment to a normal after the Federal Reserve stopped printing money and expanding its balance sheet in late-2014, and the rebalancing of energy credit pricing after a turbulent start to this year.
But analysts think the market's ongoing normalization could benefit the same financial services companies whose decline foreshadowed that of the broader banking sector.
Since the beginning of 2015, the KBW report noted, shadow banking stocks' losses are far greater than that of the traditional banking sector. But the potential for high-yield spreads to narrow means nonbank lenders (and, their shares) have a chance to jump back on the right track and post sustained gains.
In fact, businesses, including student lending, financial guarantors, mortgage insurers and auto lenders have seen their performance in 2016 outpace that of universal and large regional banks, the report said.
"We believe that there are areas of shadow banking that offer compelling valuations given still-depressed share prices," analysts wrote. "Given the relative values in the shadow banking sector, it will likely recover earlier and stronger than other financial sectors."