This disparity between banks and the broader market isn't just about performance. Bank stocks also are more volatile, and many of the industry's leading companies trade well below book value.
Why is this happening? Let me count the ways — and then float some policy options.
First, let's acknowledge the factors affecting all publicly traded stocks: a slow economy, persistent unemployment, government deficits, the mess in Europe, political uncertainty.
Of course, these factors are a big drag on bank stocks, too, but something else must explain the huge divergence between the banking sector and the rest of the market.
Some people blame the media's fixation with all things financial.
In the 24-hour news cycle world we live in today, every misstep by a bank gets magnified. Just ask Brian Moynihan. Operating at the center of society's crosshairs breeds mistrust and scares investors away from bank stocks.
Others blame the industry's many and varied exposures, including sovereign debt, derivatives, underwater mortgages and litigation related to all of the above. The risks are obvious, but just how big and deep the losses will be is unknown.
Those are both important, legitimate forces weighing down bank stocks.
But the biggest reason bank stocks trade so much lower than the broader market is the uncertainty and cost of government oversight.
Capital and liquidity requirements, interchange limits, the Volcker Rule, risk retention, stress testing. The list goes on and on; American Banker readers are all too familiar with the jumble of rules being layered on the industry.
Concerns about regulation center on how banks will make money in the future and, when they do, whether regulators allow them to return earnings to shareholders via dividends.
"It's hard to say bank stocks are undervalued, because we really don't know what kind of returns they can produce in the future," says Fred Cannon, the director of research at Keefe, Bruyette & Woods, the investment bank that created the BKX. "They have turned into value traps."
That's because returning earnings to shareholders through dividend payments has become a whole lot harder since the crisis. In February 2009, the Federal Reserve Board clamped down on dividends and only started loosening up last March. Banks with more than $50 billion in assets must get the Fed's approval before paying or increasing a dividend, and can't pay out more than 30% of earnings. None of the big banks are paying anywhere near that ceiling today.
Bank stocks have traditionally paid a steady dividend that tended to attract individual investors and certain types of mutual funds. But the government's move to curb dividends is a big turnoff for investors who count on dividend income.
"It really affects investor appeal and that in turn will lead to lower share prices, making it even harder for banks to raise additional capital," says Bert Ely, an independent consultant in Alexandria, Va., with a keen eye for bad government policy. "It's a vicious cycle."
No one is arguing banks should not be well capitalized, but no one knows when or if banks will have enough capital to satisfy the regulators, because they keep proposing new surcharges for everything from being big to thwarting procyclicality.
