What happened

Many bank stocks, including some of the largest U.S. banks by asset value, lost more than 30% of their value during the first half of 2020. These included U.S. Bancorp (NYSE:USB), Truist Financial (NYSE:TFC), and PNC Financial Services Group (NYSE:PNC), which were respectively the seventh-, eighth-, and ninth-largest banks by total asset value as of the end of 2019, with between $400 billion and $500 billion in assets each.

These banks are similar not only in asset size but also in current market cap (between $44 billion and $56 billion) and in their stocks' poor performance in the six months ended June 30, 2020. During that time, Truist's shares were down by 33.3%, PNC's share price fell 34.1%, and U.S. Bancorp's shares tumbled 37.9%, according to data provided by S&P Global Market Intelligence.

A hundred-dollar bill encased in a large ice block.

Image source: Getty Images.

So what

2020 was actually going pretty well for bank stocks until March rolled around. First, on March 3, the Federal Reserve implemented a half-percent interest-rate cut to the target federal funds rate. That was the biggest cut in years, and it was bad for banks because it reduced the amount of interest they could charge on loans, the bread and butter of commercial banks' income.

With the coronavirus crisis on its way to becoming a full-blown pandemic, the Fed cut the federal funds rate again on March 15, this time by a full percentage point, all the way down to a target range of 0% to 0.25%. That's the lowest it can go without going negative, and investors punished bank stocks. Unfortunately, there were still more problems in store.

In late March and early April, states began shutting down their economies to contain the spread of COVID-19, resulting in massive job losses. The unemployment rate skyrocketed to nearly 15%. High unemployment often leads to customers defaulting on their loans, and coupled with the economic uncertainty and the shutdowns' impact on small businesses, demand for new loans was expected to dry up. While many stock market sectors experienced a swift recovery after the March crash, bank stocks have continued to languish. That situation is likely to continue until it becomes clear that the worst of the coronavirus pandemic is in the rearview mirror.

Now what

Despite the market's reaction, these three banks have actually done pretty well for themselves operationally.

PNC outperformed much of the banking industry in the first quarter and is currently sitting on a huge pile of cash from selling its 22% stake in asset manager BlackRock. PNC CEO William Demchak has indicated he will potentially use the cash to make an acquisition, although he may want to keep some of it on the balance sheet to offset potential loan defaults.

Speaking of loan defaults, all three banks have already increased the amount of cash they're holding on their balance sheets as loss provisions for such defaults. Truist, for example, set aside $893 million on its balance sheet for loss provisions in Q1 2020, more than 5 times what it says was allocated in Q1 2019 (Truist was formed through the merger of SunTrust and BB&T in late 2019, so prior figures are retroactively calculated). Otherwise, though, Truist posted comparatively strong results in its first quarter.

U.S. Bancorp, meanwhile, also outperformed expectations in Q1 and is well capitalized. It has already announced it will maintain its dividend payout in Q3. PNC has pledged the same. The just-merged Truist is still trying to decide.

Their relative strength is one reason that PNC and U.S. Bancorp, despite underperforming the market, are trading above their respective book values when many of their peers -- including Truist -- are not. However, shares of all three banks are undeniably cheap right now. But even the brightest spots in the banking sector are likely to underperform while the COVID-19 fallout continues.

If you're a value investor with high risk tolerance who doesn't mind a potentially lengthy wait for a recovery, you might want to take a closer look at these relative outperformers in a beaten-down sector.