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After a miserable 2018, big U.S. bank stocks could be in for a lift if coming earnings releases show strong fourth-quarter loan growth helps to offset weak trading revenue.

And some bargain hunters are also betting on stronger 2019 growth than current valuations imply.

The S&P 500 bank index fell 18.4 per cent in 2018 compared with a 6.2-per-cent drop for the broader S&P 500 as investors fled banks on concerns about slowing economic growth, weakening credit, a flattening yield curve and bets the Federal Reserve would slow down interest rate hikes.

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While some investors are still wary of the sector, which was at the epicentre of the previous economic downturn, others say the sell-off went too far. Lisa Welch, lead portfolio manager for the John Hancock Regional Bank Fund in Boston, was encouraged by a pickup in loan growth data in the fourth quarter and also expects banks to report improving net interest margins.

“With the valuations they’re trading at, we see banks as an extremely attractive buying opportunity,” Ms. Welch said. “Bank stocks were acting like the economy in the U.S. was going into a near term recession. We disagreed.”

S&P 500 banks currently trade about 9 times forward estimates, well below the long-term median of 11.6 and the long-term average of 12.7, according to data from Refinitiv.

“Even with a little more cautious view on the economy, that’s going to slow from the growth we had in 2018, we still think there’s a lot of earnings growth potential,” Ms. Welch said.

On Friday, the S&P bank sector was up 0.2 per cent compared with a 0.2-per-cent decline for the benchmark index.

The fourth-quarter corporate reporting season will kick off with results from Citigroup Inc. on Monday, Jan. 14, followed by JPMorgan Chase & Co. and Wells Fargo & Co. the next day.

Wall Street expects 25.5-per-cent fourth-quarter earnings growth for S&P 500 banks and 27.4 per cent for 2018, according to IBES data from Refinitiv which show bank earnings growing at 10.7 per cent in 2019.

According to Jefferies analysis of Federal Reserve data, U.S. bank loans grew 4.7 per cent year-over-year in the fourth quarter compared with 3.2 per cent a year ago, while commercial and industrial loans grew 9.2 per cent in the fourth quarter compared with 2.6 per cent in the year-ago quarter.

“We’ll have to see if that’s sustainable but at least that’s a better story for the fourth quarter,” said Kush Goel, senior research analyst at Neuberger Berman in New York. “People have become too pessimistic on the group. Loan growth and commentary will be better than people fear.”

Many bank investors have worried that bank credit costs will rise as the current economic expansion ages and as economic growth slows.

The sector has also been crushed by uncertainty about how much further the Federal Reserve will raise interest rates and how its hiking path will affect net interest margins and loan growth. While higher rates tend to boost bank margins, they could also stunt loan demand as borrowing gets more expensive.

Aaron Dunn, co-director of value equity for Eaton Vance in Boston, estimated a less than 50-per-cent chance of a “Goldilocks situation” where Fed policy is just right for banks.

While Mr. Dunn said bank stocks could rise in 2019, some valuations do not look cheap when rising credit costs are taken into account.

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“You’ve seen the peak in great credit and it’s probably likely to get worse from here. I’m not saying its going to fall apart, just incrementally,” said Mr. Dunn, who favours Citigroup shares over JPMorgan owing to their valuations.

“I wouldn’t say we’re pounding the table buyers here in financials and banks. We’re picking up a couple of good opportunities here and there,” he said.

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