(Reuters) – The U.S. bank sector has been pummeled this year but investors hunting for bargains there may need deep reserves of patience as banks are particularly sensitive to low interest rates, the uneven economic recovery and the muddy stimulus outlook.

The S&P 500 Bank subsector , which kicks off its third-quarter earnings season on Oct. 13, was last down 33.7% for the year-to-date compared with a 5.8% gain for the S&P 500 index.

Banks have been such a drag on the broader S&P financial index that its 19% year-to-date decline is second only to energy’s 49.9% drop among the S&P 11 major sectors.

To be sure, if lawmakers in Washington manage to reach an agreement, a new fiscal stimulus package could help banks if it boosts U.S. loan growth, interest rates and economic activity.

And the bank index is up 12% from its intraday trough on Sept. 2 to a peak on Oct. 6 as yields for longer-dated U.S. treasuries have risen with stimulus hopes as banks profit from higher interest rates.

But investors are unconvinced that recent gains will be sustainable as the Federal Reserve has signaled plans to keep overnight rates low for the foreseeable future in order to aid an economic recovery, which is expected to take years.

“You’re looking at years for this sector to make a full recovery. It will take a lot of positive things to happen in the U.S. economy for it to get back to the type of performance we are seeing in the broader S&P,” said Rick Meckler, partner, Cherry Lane Investments, a family investment office in New Vernon, New Jersey. “Investors, in my view, will need to be patient.”

Banks were outperforming the market on Thursday on renewed hopes for stimulus pact after U.S. President Donald Trump said, without giving details, that there was a good chance of a deal.

But as of Thursday afternoon there was no deal although U.S. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin were set to continue with talks.

Meckler says further stimulus would be “a good first step towards a better environment for (banks) to generate top-line and bottom-line growth.”

But he does not see stimulus as a panacea to provide much change to low interest rates, low borrowing and weak credit, which has plagued the sector.

Money manager Villere & Co has been drawn by low valuations in bank stocks such as First Hawaiian Inc, down 44% year-to-date, and Kearny Financial Corp, off 41% so far in 2020.

Lamar Villere, co-portfolio manager, says these banks are small enough that he can more easily examine their risks than the exposures of more geographically diverse and larger banks like JPMorgan Chase & Co or Wells Fargo & Co .

But even this cautious strategy is only suitable for those who can “wait it out long term,” said Villere who expects weaker results from the sector in the short and intermediate term.

“What’s baked in is some pretty terrible numbers,” he said.

JPMorgan and Citigroup Inc will start the ball rolling on the third-quarter earnings season on Oct. 13 followed by Wells Fargo and Goldman Sachs and Bank of America Corp the next day.

On average the S&P 500 bank sector is expected to show a third-quarter earnings decline of 31% and a revenue decline of 6.7%, according to estimates gathered by Refinitiv.

The majority of big U.S. banks did manage to beat very low earnings per share and revenue expectations for the second quarter, according to Refinitiv.

But for now, John Augustine, chief investment officer at Huntington National Bank in Columbus, Ohio is staying away from the sector citing weak net interest margins.

“Banks need to deliver this quarter,” Augustine said.

(Graphic: Banks underperform broader market – )

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