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"

Financials - Clear Runway Ahead?

The Taper

The Federal Reserve indicated that the central bank is likely to begin withdrawing some of its stimulatory monetary policies before the end of 2021. Although interest rate hikes are likely off in the distance, the economy has reached a point where it no longer needs as much monetary policy support. This pivot in monetary policy by the Federal Reserve sets the stage for the initial reduction in asset purchases and downstream interest rate hikes. As this pivot unfolds, risk appetite towards equities hangs in the balance. The speed at which rate increases hit the markets will be in part contingent upon inflation, employment, and of course, the pandemic backdrop. Inevitably, rates will rise and likely have a negative impact on equities.

A string of robust Consumer Price Index (CPI) readings spooked the markets as a harbinger for the inevitable rise in interest rates. Although rising rates may introduce some systemic risk, the financial cohort is poised to go higher. Moreover, the confluence of rising rates, post-pandemic economic rebound, financially strong balance sheets, a robust housing market, and the easy passage of annual stress tests will be tailwinds for the big banks.

2021 Financial Stress Tests Easily Pass

The recent stress tests were easily passed and indicated that the biggest U.S. banks could easily withstand a severe recession. In addition, all 23 institutions in the 2021 exam remained "well above" minimum required capital levels during a hypothetical economic downturn. Continue reading "Financials - Clear Runway Ahead?"

The Inevitable Rise In Rates

Consumer Price Index (CPI) Market Scare

A string of robust Consumer Price Index (CPI) readings spooked the markets as a harbinger for the inevitable rise in interest rates. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed. The overall markets have been on a blistering bull run since the November 2020 presidential election cycle. The overall markets as assessed by any historical measure have reached stretched valuations with record risk appetite. As real inflation enters the fray, these frothy markets will come under pressure and possibly derail this raging bull market. Although rising rates may introduce some systemic risk, the financial cohort is poised to go higher. The confluence of rising rates, post-pandemic economic rebound, financially strong balance sheets, and a robust housing market will be tailwinds for the big banks.

Financials

The prospect of rising interest rates coupled with fantastic earnings have propelled bank stocks to all-high highs. Citigroup (C), JPMorgan (JPM), Bank of America (BAC), and Goldman Sachs (GS) have appreciated to all-time highs. Rising interest rates in combination 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. Continue reading "The Inevitable Rise In Rates"

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.

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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"

Big Banks Moving Beyond COVID-19

Citigroup (C), JPMorgan (JPM), Bank of America (BAC), and Goldman Sachs (GS) are all fresh off earnings with the highly disruptive COVID-19 backdrop still festering. The headline numbers were fantastic with beats on both the top and bottom line for Citigroup, JPMorgan, and Goldman Sachs, with Back of America missing on top-line revenue but beating on bottom-line profit. Big banks are evolving to the COVID-19 landscape domestically and abroad despite the 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 are critical elements.

The business's customer side continues to be problematic as the pandemic's duration continues to drag on with no signs of slowing. A segment of the consumer base is faced with lost wages and the real possibility of not meeting their financial obligations, which will unquestionably have a negative impact on revenue and earnings. Capital preservation is now at the forefront, with share buybacks being halted and dividend payouts arrested. Large capital reserves have 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.

Post Financial Crisis - Big Banks Prepared

The big banks are far stronger and more prepared than they were during the 2008 Financial Crisis and have rigorous annual stress tests that maintain fiscal discipline. Banks are well capitalized and working with clients and consumers on payment deferrals if impacted by the pandemic. Continue reading "Big Banks Moving Beyond COVID-19"