By Sinéad Carew
(Reuters) – As U.S. bank stocks have had a rocky start to the year, investors and analysts see accelerating loan growth and Federal Reserve interest rate hikes boosting the sector.
The economic recovery in the United States has boosted consumer spending, which encourages businesses to build inventory and, in turn, has increased demand for business loans.
And while net interest income, the difference between the rates banks charge for loans and what they pay for deposits, has weakened during the pandemic, that’s set to change in 2022 with rate hikes. interest rate, which the Fed aims to use to help tame runaway inflation.
After rebounding in 2021 and early 2022, the S&P 500 Banking Index fell 15% from its all-time high last month, as rising spending and weak trading revenue from companies such as JPMorgan caused shun investors.
Since bank lending earnings depend on a steepening yield curve, recent curve flattening has added to investor concerns the difference between 2-year and 10-year US Treasury yields. reaching its narrowest level since November 2020.
As inflation surged, traders bet on an increasing number of rate hikes in 2021.
As higher rates favor the banks, their share price declines reflect concerns that the Fed could “bring the brakes much harder” than initially expected and end up hurting the economy, according to Mike Cronin, chief investment officer at Boston-based asset manager abrdn. But he is bullish on the banks.
“Spending was an issue in the fourth quarter, but we set the bar on that,” Cronin said. “Now it’s a bit more about the economy and rates. If we continue to see modest economic growth and accelerating loan growth going forward, that bodes well for the sector in 2022.”
Compared to March 2020, when they traded at 6.8 times earnings expectations for the next 12 months, bank stocks have rallied significantly. But the current S&P banking index price-earnings ratio of 12.9 is still below the S&P multiple of 19.5.
With the KBW Regional Banks Index currently trading at around 70% of the S&P 500 multiple from its more typical level of 90%, the sector looks cheap for KBW’s director of research, Matthew Kelley.
“Banking fundamentals are actually strengthening,” Kelley said, citing loan growth and rising rates. Although higher spending has hurt earnings, he sees “more than enough positive things happening with the banks in the lead to offset that.”
Kelley says the recent sell-off in bank stocks was exacerbated by the flattening of the yield curve, which was the result of fears about the economy that he believes will prove transitory.
Timely, bank stocks rose more than 2% on Friday, their biggest one-day gain since Jan. 6, after a stronger-than-expected jobs report provided reassurance on the economy.
Wall Street analysts expect quarterly earnings per share for the largest U.S. banks to decline in 2022, according to Refinitiv. After setting aside additional reserves for loan losses in 2020, banks were able to release unused reserves last year, which artificially inflated earnings last year, drawing a difficult comparison between 2021 earnings and of 2022.
While investors have been betting on Fed rate hikes for some time, analysts say bank stocks don’t fully reflect those expectations. KBW’s Kelley notes that during the 2016-18 Fed tightening cycle, bank stocks only peaked 21 months after the policymaker began raising rates.
“Conceptually the price is priced in, but quantitatively there is upside potential,” Piper Sandler analyst Jeffery Harte said.
(Reporting by Sinéad Carew in New York; Editing by Alden Bentley and Matthew Lewis)