2011 was a year the U.S. banks would like to forget. Stocks declined 24.6%, underperforming the S&P 500 by the same amount (SPX ended the year unchanged). This was the fifth worst result since 1937 (i.e., the first year of available return data). It also marked the 7th year out of the last 8 in which the banks underperformed (and it would have been 8 of 8, except the banks rose over 15% in December 2010). This is highly noteworthy since the banks have outperformed almost exactly half the time in the last 74 years. And 2011 was the worst result for bank stocks in a year in which credit losses declined. (Sources: Barclays, FDIC, HCP.)
What is even more surprising about the year is that virtually all of the important individual predictors of performance were positive.
First, credit losses are on track to post – by far – their largest annual decline since 1937 (and more than double that of 1993, which experienced the second largest decline since the ‘30’s, and ended a three year period of bank outperformance totaling 50%). Second, nominal GDP growth was solidly positive. Third, interest rates declined, and inflation was benign. Fourth and finally, even though only three quarters have been completed, reported net income has already increased by nearly 10% over full year 2010 (while core earnings have essentially returned to pre-crisis levels, with credit leverage remaining).
Importantly, these factors tend to be associated with positive bank returns and all are expected to recur in 2012, meaning history suggests strongly that bank stocks will both rise and outperform.