Displaying items by tag: banks

(New York)

Investors who own bank stocks or ETFs have probably been shocked over the last couple of days. The financial sector lost 4% yesterday alone. Many may be wondering why. While no one is quite sure, there do seem to be some concrete reasons, and not just because of the Italian drama. The bigger culprit is likely because of tumbling US Treasury yields, which have fallen from well above 3%, to well below 2.9%. Banks stocks have historically performed poorly in periods of flattening yield curves. Lower rates and yields hurt banks’ net interest margin.

FINSUM: US banks have very little exposure to Italy, so there is no reason for any meltdown fears, yet the sector has reacted almost overly strongly. It seems the only explanation has to do with US yields falling.

(New York)

Bank stocks have had somewhat of a rough time this year. Like the rest the of the market they have been subject to turbulence. However, Barron’s says that clear sailing might lay ahead, as the stocks are looking less risky and likely to have more gains. The reason why is that bank stocks have been showing less and less beta lately, meaning they are trading at less relative volatility to the market than previously. This will lower their cost of capital and keep things steadier as rates rise, which will be bullish for performance. According to one research analyst, “Higher rates will have a positive impact on earnings, loan growth appears to be picking up, and we expect further regulatory relief”.

FINSUM: Given that higher rates improve net interest margins for banks, and the fact that there is significant regulatory relief occurring, we are feeling optimistic.

(New York)

The Trump era of deregulation is really starting to play out for the financial services industry. On top of the collapse of the Volcker rule, banks might be about to enjoy a major concession from regulators: the assumption that short-term trades are automatically a violation of the rule. The Fed and other regulators are planning to drop the assumption that a position held by a bank for less than 60 days is a violation of the Volcker rule.

FINSUM: This would be a major development as banks would be left to comply with the rule on their own terms. That shifts the burden of proof onto regulators, who would now need to prove a trade was a violation.

(New York)

Something very odd is happening in the stock market. Despite the fact that rates look likely to rise and yields are rising sharply, financial stocks are losing ground. This is the opposite of what one would expect, as higher rates boost profit margins for banks and the like. No one is quite sure why, but it seems that instead of boosting hopes for earnings, higher rates have investors worried about a weaker economy to come, which would be negative for banks, which are quite tied to economic performance.

FINSUM: To us this is a quite a bearish view, as it indicates that investors see stagflation coming on (higher rates with zero or negative growth.

(New York)

If you are looking for a sign of how bank earnings might be doing, look no further than Goldman Sachs. Goldman has struggled over the last several quarters as its trading business has failed to generate much revenue because of the broad lack of volatility over the last couple of years. However, in a divergence from the norm, this quarter is supposed to be very strong because of the volatility that has hit markets. One of the big x-factors in the earnings will be how Goldman’s proprietary investments perform.

FINSUM: If Goldman does well it will bode well for the rest of the banks, especially because other trading divisions will likely see a pick up too.