Banks on the Move...again

Macro Perspectives: Mon 11 Apr 2021

I’ve been highlighting bullish pressures for the financial sector ($XLF) overall for a while now, Banks ($KBE) are up 25% this year compared with a 8% gain in the S&P 500. Thus far, the sector has benefited from improved economic outlook and rising rates and we see even more levers for growth.

In stark contrast, at this time last year, investors were - correctly - fleeing from banks. Now, the tide is turning. Positive analyst estimates suggest the sector is one of the better bets on Wall Street and will continue to provide tailwinds for momentum plays.

Matt O’Connor, analyst at Deutsche Bank, sees earnings per share increasing by as much as 20% in 2023 & 2024, with stocks gaining as much as 50% over the next two to three years. A big and as yet unrealised factor is loan growth: a 10% jump in loan growth adds roughly 8% to banks’ earnings. The sector generally needs to see a full percentage point increase in interest rates to see a similar impact to earnings.

There are more factors that will help banks: one is the expectation of strong reserve releases. Ahead of the “Greatest Depression” last year, or fears of one atleast, banks added billions to their reserves in the expectation of looming credit losses. Now, as the economy recovers faster and better than expected, those releases get written back into earnings.

The Federal Reserve also imposed restrictions on buybacks and dividend payouts last year, forcing banks to conserve capital during the downturn. But last month the Fed said it was looking to ease those restrictions if banks perform well in the annual stress tests.

Our models currently highlight positive pressures in JPMorgan ($JPM), Morgan Stanley ($MS) and Goldman Sachs ($GS).

Lastly, for your entertainment, enjoy: JPow