The G20 summit took place in Bali, Indonesia, on November 2022…
It’s All About Those Banks
Information is not investment advice
Over the last 18 months, governments have printed an unbelievably large amount of money. And while these measures help the economy to rise and thrive, the consequences can be severe for everyone. Let’s discuss, what role do banks have in all this and how can we forecast their future actions and stock price’s prospects.
Banks during the Covid-19
As one of the crucial members of society, financial institutions have several main functions to maintain the economy in a good state. During the pandemic, banks have been active on a number of fronts. Among them are:
- Providing cash flow support. Governments implementing lockdowns mean businesses and individuals are being starved of income. Expenses, however, still have to be met. Since the biggest cash outflow for individuals or small and medium-sized enterprises (SMEs) tends to be for a mortgage or some other loan, banks have announced moratoriums on interest and principal payments until the year-end. This is affecting the overall banks' income badly, but government helps banks by printing more money.
- Change of lending rules. In 2019 interest rates on bank credit to the private sector in the US was 5.5%. Now it is around 3.25%. The Government has stepped in to cover risk up to 80% of some SME loans. This improves a bank's ability to give a loan to the borrower.
- Helping customers do their banking digitally. With employees working from home, it makes no sense to still have to go to the branch to carry out banking transactions. Also, it is a safety issue.
In a nutshell: banks were trying to help SMEs amidst lockdowns and sharp reduction of economic activity. Their goal is to maintain as many payrolls as possible and keep the unemployment rate under control. That’s why we are watching after NFP data closely, it reflects broad market conditions.
The post-pandemic era
Banks’ stocks have risen for the last year and a half because of:
- Government, that printed trillions of dollars and stimulated the economy.
- Banks’ investment activity. The stock market soared, alongside banks’ profit.
- The rapid growth of the deposits in the banks. Only in Bank of America the overall amount of deposits have increased by 20% for the last year and has almost reached $1 trillion.
Moreover, there are prospects for banks to gain even more. Accelerating economic recovery contributes people to borrow more money, though, not as much as expected. As the result, banks gain the potential to increase their buyback programs. Morgan Stanley and Wells Fargo were among the banks that said in June they would increase dividends and buy back more of their stock. Collectively, JPMorgan, Bank of America, Wells Fargo, and Morgan Stanley have announced they’ll repurchase $85 billion in shares.
It would be weird not to mention the consequences of rate hikes. As the banks now have enormous sums of money in loans, and floating rates are used widely, raising the federal funds rate by 1% will result in billions of dollars profit in a matter of a year. And we know that rate hikes are just a matter of time.
The nation’s biggest banks are about to report profits, and for behemoths including JPMorgan Chase and Goldman Sachs they are expected to fall when the banks report third-quarter results this week. As we can see, rapid growth in S&P 500 earnings will decrease over time as tapering comes into full strength.
This week, 6 biggest banks will release their quarterly earnings report, including:
- JPMorgan Chase (Oct 13), expected to lose 3.7% revenue growth,
- Bank of America (Oct 14) expected to lose 0.2% revenue growth,
- Citigroup (Oct 14), expected to lose 15.5% revenue growth
- Morgan Stanley (Oct 14), expected revenue growth at around 11.8%
- Wells Fargo (Oct 14), expected to lose 9.0% revenue growth
- Goldman Sachs (Oct 15), expected to lose 8.8% revenue growth
Notice, that you can trade these banks’ stocks with FBS!
It’s understandable for banks to lose the pace of growth. Previous reports were positive due to stimulus, but the time of trillion-dollar money printed out of thin air is gone. Current supportive measures just aren’t strong enough to increase banks’ revenues compared to last quarter. What is in our sphere of interest, though, is Morgan Stanley, which is expected to increase revenue. We suppose the following reasons:
- The growth was complemented by a rise in wealth management revenues. Notably, the wealth management total client assets received a big boost from the acquisition of E*TRADE in the last quarter of 2020 and may continue now in the light of unending growth in broker companies’ clients.
- Asset management and related fees increased because of the Eaton Vance acquisition and higher AUM (Assets under management).
If to say for the whole financial industry, the end of the pandemic will keep the Covid-19 legacy. We are talking about the transition to online banking and the increase in the number of retail investors and traders, who are trying to deal with the market by themselves. This, in turn, will help the banks to refrain even against tapering and rates hikes.
Resistance: 106.0; 109.0; 125.0
Support: 96.5; 91.0; 87.5
At the end of the day, banks anticipate rate hikes, so future tapering doesn’t seem to be so crucial for them. For now, expectations from the reports are mostly negative (Morgan Stanley is a reasonable exception) due to stimulus reduction. What’s more important is the bank’s forecasts of their future revenues. We will hear from them shortly. As for now, it is a perfect opportunity to consider increasing the bank’s share in your investment portfolio.
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