Earnings Signal Banks Stocks Are Still Attractive
Investing.com | Oct 15, 2021 15:51
Earnings from the top US lenders this week showed their stock rallies still have more room to run, despite some analysts’ doubts about future gains.
After soaring during the first half of the year, US bank stocks were under pressure on speculation that the profit boom won’t be strong enough to justify the heady run-up. Banks, however, have shown this week that recovery in their earnings is strong and broad-based.
Bank of America (NYSE:BAC) beat analysts’ earnings estimates yesterday with a big margin for the third-quarter, boosted by a record-breaking period for mergers and acquisitions. Investment banking advisory fees rose 65%, while overall investment banking fees were up 23%. Net interest income, or revenue from customer loan payments minus what the company pays depositors, rose 10%.
Said Bank of America CEO Brian Moynihan in a statement Thursday:
“The economy continued to improve and our businesses regained the organic customer growth momentum we saw before the pandemic. Deposit growth was strong and loan balances increased for the second consecutive quarter, leading to an improvement in net interest income even as interest rates remained low.”
JP Morgan (NYSE:JPM), the nation’s biggest bank, also reported Q3 profit that rose 24%, from the same period a year ago, indicating that a long-awaited turn in loan growth may be nearing.
“Two years ago we were facing COVID, virtually a Great Depression, a global pandemic—and that’s all in the back mirror, which is good,” said Chief Executive Jamie Dimon on a conference call as reported by Wall Street Journal.
h2 Loan Growth Is Returning/h2“Hopefully, a year from now there will be no supply-chain problem. The pandemic will become endemic.”
US bank stocks have outperformed the benchmark S&P 500 Index by a big margin this year on optimism that higher trading volumes, the reopening of the economy and a spending binge by consumers will continue to fuel earnings. The KBW Bank Index’s 37% jump this year, led by some of the largest lenders, including, JP Morgan, Bank of America and the Goldman Sachs (NYSE:GS). Some of these assessments, in our view, still hold.
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For example, there remains a huge pent-up demand for credit that got hammered during the pandemic. From individual borrowers to large corporations, 2020 was the year when spending plans were scrapped as lockdowns forced potential borrowers to preserve cash and cut costs.
That situation is unlikely to persist as the US economy gains steam. Combined with the government’s infrastructure spending and a gradual tapering off monetary stimulus, banks could see demand for credit pick up substantially from here.
JP Morgan said in its latest earnings report that excess cash some customers have been holding in deposit accounts during the pandemic is depleting faster, likely a sign that their debts will grow. The bank expects the holiday season to be the typical boon for card spending.
Gerard Cassidy at RBC Capital Markets said in a recent Bloomberg report that bank stocks continue to remain attractive because loan growth will come after companies and individuals use up their liquidity accumulated during the pandemic.
What’s more, credit quality is strong and margins could improve next year as short-term rates rise.
“Combine that with increased loan growth, the revenue growth picture could turn out to be very positive for the banks in 2022,” Cassidy said.
Bottom Line
Bank stocks have been one of the best trades of 2021, making many investors wonder how far this rally can go. Lenders’ latest earnings show that it’s not a good idea to short this trade as yet, especially when the US economic recovery is taking hold and the Federal Reserve is on course to raise interest rates.
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