Big Banks' Meltdown Overblown

Higher Expenses and Geopolitics

Capping off 2021, the cohort of big banks had the perfect set-up with secular trends via a confluence of a rising interest rate environment, post-pandemic economic rebound, financially strong balance sheets to support expanded buybacks and dividends, a robust housing market, and the easy passage of annual stress tests. However, as earnings season kicked off in January 2022, investors saw a step-up in expenses, specifically wage inflation. Bank of America (BAC), JPMorgan Chase (JPM), Morgan Stanley (MS), Wells Forgo (WFC), and Goldman Sachs (GS) all reported very strong quarters; however, investors couldn't look past the increasing expenses and these stocks sold-off as a result.

To exacerbate the sell-off across the financials, the geopolitical backdrop with the Russian/Ukraine conflict paved the way for a second leg down. This one-two punch resulted in BAC, JPM, and GS selling off 18.3%, 22.3%, and 22.6%, respectively, from their 52-week highs through the first week of March. However, as Jerome Powell sets the stage for an economic "soft landing" with the clear commitment of raising interest rates by 25-basis points and the geopolitical headwinds inevitably abating, the big banking cohort looks appealing at these levels.

Big Banks

Immaterial Geopolitical Exposure

The big banking cohort has minimal to no direct exposure to Russia; thus, the second leg down in this space is not tied directly to the geopolitical conflict. This is especially important as the geopolitical tensions rage on and possibly snap up these stocks as a function of overall market sentiment. Overall, the big banks generate an inconsequential amount of revenue from Russia, per Bank of America's analysis of regulatory 10-K filings. Continue reading "Big Banks' Meltdown Overblown"

2022 Financials Outlook

2021 Tailwinds

The big banks have benefited from a confluence of a rising interest rate environment, post-pandemic economic rebound, financially strong balance sheets, a robust housing market, and the easy passage of annual stress tests. Earnings season kicks off in January for all the major financials. The most recent earnings reports from the core financials such as Bank of America (BAC), JPMorgan Chase (JPM), and Goldman Sachs (GS) all reported very strong quarters with stock prices breaking out to all-time highs prior to the Q4 overall market turbulence. The biggest banks, by assets, posted profit and revenue that beat expectations. These results came on the heels of booming Wall Street deals and the release of funds previously earmarked for pandemic-related defaults. The big bank cohort is in a sweet spot of a post-pandemic consumer, with rising rates and balance sheets to support expanded share buybacks and dividend increases. These stocks are inexpensive and stand to capitalize on all these tailwinds heading into 2022.

Resilient Consumer

The pandemic has been going on for two-plus years, and the big banks have navigated the coronavirus volatility over this stretch. Throughout the rolling pandemic, the consumer has been resilient, and the potential worst-case financial downsides did not materialize (i.e., massive loan defaults). In addition, the consumer has been strong in retail, housing, autos and the overall holiday spending was robust.

Bank of America CEO Brian Moynihan stated that whether it was a return to loan growth, credit-card signups, or economic indicators like unemployment levels, the company was back in expansion mode. "The pre-pandemic, organic growth machine has kicked back in," "You see that this quarter, and it's evident across all our lines of business." Loan balances at BAC increased 9% on an annualized basis from the second quarter, driven by strength in commercial loans, the company said. Continue reading "2022 Financials Outlook"

Big Banks - Rising Rates And Earnings Synergy

Stellar Earnings

The big bank cohort reported stellar earnings across the board and set the stage for earnings season while sparking a broad rally across the indices. The big banks have benefited from a confluence of impending rising rates, post-pandemic economic rebound, financially strong balance sheets, a robust housing market, and the easy passage of annual stress tests. The most recent earnings reports confirm this secular thesis as Bank of America (BAC), JPMorgan Chase (JPM), and Goldman Sachs (GS) all reported very strong quarters, with stock prices nearing all-time highs. The big bank cohort is in a sweet spot of a post-pandemic consumer, rising rates and balance sheets to support expanded share buybacks and dividend increases. These stocks are inexpensive and stand to capitalize on all these tailwinds over the long term.

A Healthy Consumer

The big banks are already transitioning beyond the pandemic based on the results and commentary from the collective companies’ top executives during their respective Q3 earnings. The six biggest banks by assets posted profit and revenue that beat expectations. These results came on the heels of booming Wall Street deals and the release of funds previously earmarked for pandemic-related defaults.

Bank of America CEO Brian Moynihan stated that whether it was a return to loan growth, credit-card signups, or economic indicators like unemployment levels, the company was back in expansion mode. “The pre-pandemic, organic growth machine has kicked back in,” “You see that this quarter, and it’s evident across all our lines of business.” The company said that loan balances at BAC increased 9% on an annualized basis from the second quarter, driven by strength in commercial loans. Continue reading "Big Banks - Rising Rates And Earnings Synergy"

Did The Fed Just Send A Message?

In case you missed it, last Friday, the Federal Reserve agreed to let a year-long suspension of capital requirements for big banks that allowed them to exclude Treasury securities and deposits held at the Fed from their supplementary leverage ratio expire at the end of the month.

While the subject of bank capital ratios usually puts some people to sleep, the Fed decision could have very real consequences for the financial markets and the nascent economic rebound at large. It also seems to diverge from the Fed’s own stated and oft-repeated monetary policies.

Then again, the Fed may have just sent a subtle message that its low-rate stance is about to change.

As the New York Times explained, the intention of relaxing the banks’ capital requirements last year at the outset of the pandemic-induced economic lockdown “was to make it easier for financial institutions to absorb government bonds and reserves and still continue lending. Otherwise, banks might have stopped such activities to avoid increasing their assets and hitting the leverage cap, which would mean raising capital. But it also lowered bank capital requirements, which drew criticism.”

At a practical level, Friday’s decision may add further fuel to the fire that is driving up bond yields by discouraging banks from buying Treasury securities, which would seem to run counter to the Fed’s low-interest-rate policy. The Fed, of course, is buying trillions of dollars of Treasury and mortgage-backed securities, which it has stated it has no intention of stopping. Yet, it saw fit to make a move that could have the effect of driving the banks – also big buyers of government securities – out of the market. So why did the Fed do this? Continue reading "Did The Fed Just Send A Message?"

The Prospect Of Higher Rates Boost Big Banks

The prospect of rising interest rates has propelled bank stocks to all-high highs. Citigroup (C), JPMorgan (JPM), Bank of America (BAC), and Goldman Sachs (GS) have appreciated double digits over the past three months, breaking out to all-time highs. Rising interest rates combined with the highly disruptive COVID-19 backdrop abating has served as the foundation for this move higher. The big banks responded and evolved in the face of COVID-19 to the real possibility of widespread loan defaults, liquidity issues, ballooning credit card debt, and stressed mortgages. To exacerbate these COVID-19 impacts, interest rates, Federal Reserve actions, yield curve inversion, and liquidity heavily weighed on the sector.

Along with this turn higher, balance sheets have become even stronger now that share buybacks have been halted and dividend payouts were arrested. Large capital reserves have already been put aside for anticipated financial challenges. The big banks have demonstrated their ability to evolve in the face of COVID-19 and present compelling value. Now with the prospect of rising rates, this may serve as a long-term tailwind for banks to appreciate higher.

Bank

COVID-19 and Financial Crisis – Lessons Learned

The big banks are far stronger and more prepared than they were during the 2008 Financial Crisis. Lessons learned from the Financial Crisis yielded rigorous annual stress tests that forced banks to maintain a slew of fiscal discipline measures. With the Federal Reserve working in-hand with the banks, a financial bridge to those businesses and consumers negatively impacted by COVID-19 as a stop-gap measure has been afforded. As this pandemic subsides and economic activity rebounds the banks' present value. Add in the prospect of higher rates, and the banks are set-up for long-term appreciation. Their strong cash positions and healthy balance sheets are allowing dividends to continue as the economy transitions through the damage of the pandemic. Continue reading "The Prospect Of Higher Rates Boost Big Banks"