investors have sent bank stocks soaring since the u.s. election as interest rates have risen and expectations have grown that regulation and taxes won<u+2019>t weigh as heavily. that has given rise to something new: a belief that banks, which investors had come to view as akin to utilities, will once again be able to go for growth. if so, some investors reckon, bank stocks may deserve valuations more in line with those of the overall stock market, rather than trading at a discount to it. although bank stocks took a breather tuesday, they are still up sharply since election day on nov. 8 . the question of whether bank stocks have risen <u+201c>too far too fast in a week is probably fair,<u+201d> said tom eck, a portfolio manager at cortina asset management. <u+201c>at the same time, the likelihood of higher economic growth and a steeper yield curve actually is a fundamental change for the industry and how the stocks need to be valued.<u+201d> bank of america corp. , for instance, is up more than 18% since the election of donald trump as president, and its shares closed above $20 this week for the first time since fall 2008. the bank<u+2019>s forward price/earnings ratio is at a discount of about 22% to the s&p 500. but that has quickly narrowed: the discount was 33% the day of the election, and it was nearly 50% in early july, right after the u.k.<u+2019>s vote to leave the european union . meanwhile, big-bank share prices are trading at a healthier multiple to their book value, or intrinsic worth, than earlier this year, signaling that investors believe banks will be better able to earn a decent return on their capital. bank of america and citigroup inc. still trade at a discount to book value, or 83% and 74% of book value, respectively. but both were trading at around half of book value earlier this year. j.p. morgan chase & co., which had been trading at around book value for much of the year, is now at 124% of book. overall, bank stocks have handily outpaced rises in broader markets since the election. the kbw nasdaq bank index was up around 14% since election night as of tuesday<u+2019>s close. this compares with a rise of 3% for the dow jones industrial average over that span. an index of smaller regional lenders is up about 17%. before the election, many investors thought banks couldn<u+2019>t grow much in a low-rate, low-margin world that looked like it was here to stay. on top of this, more stringent post-financial-crisis regulations have forced banks to hold more capital, damping returns. that left banks looking a lot more like utilities. now, that thinking is changing fast. a move higher in interest rates and a steeper yield curve<u+2014>when the gap between long-term and short-term interest rates gets wider<u+2014>suggest bank profits should improve. more relief could be on the way if the federal reserve again increases short-term rates in december. and any move to undo or lessen regulation could allow banks to return more capital to investors, which in turn would boost returns on equity. that would lead to higher profits and could argue for higher valuation multiples, some analysts believe. sandler o<u+2019>neill + partners analysts estimate those factors, along with the possibility of a cut to the corporate-tax rate, would bolster bank earnings by around 40% on average. this is leading to <u+201c>euphoria<u+201d> among investors, even though the president-elect<u+2019>s actual plans remain largely unknown, said scott siefers, a sandler o<u+2019>neill analyst. the changing conditions may also be luring in portfolio managers who invest across industries because bank stocks still often trade at lower valuations than stocks in other industries, said joe fenech, an analyst at hovde group. the switching of investments from one sector to another may have accounted for the fact that while bank stocks were rising in recent days, many tech stocks were falling. that said, the recent sharp gains in share prices don<u+2019>t seem to account for potential risks in the new environment, such as credit deteriorating as rates rise, mr. fenech said. and while markets are assuming a regulatory overhaul would benefit banks, there could be winners and losers. mr. trump has previously indicated some support for reinstating a glass-steagall-like separation of commercial and investment banking and that was included in the republican party<u+2019>s platform. that would be bad for the biggest banks, potentially forcing them to split or shed businesses. paulo silva, senior portfolio manager at penn capital management, said he is considering adding to his position in the banking sector. he invested in smaller banks such as north carolina-based bnc bancorp in recent years in part because he thought they were undervalued. despite the run-up in prices, he now sees new reasons to buy the stocks. for bank investors, <u+201c>the cons are almost taken off the table,<u+201d> mr. silva said. write to rachel louise ensign at rachel.ensign@wsj.com
a radical new thought: banks are growth stocks - wsj
rachel louise ensign