August 1, 2018

Bank Stock Investments: Is Sentiment About to Change?


Bank stocks have been market underperformers in 2018. But investor sentiment may begin turning around, as bank earnings are expected to be very strong for the quarter. Loan growth, both overall and in business loans, has started to pick up after a prolonged slowdown. Finally, concerns about the effect of flattening yield curves, feared by some investors, are thought to be overstated by many observers, as banks are making profits more on the short end of the yield curve.


As of mid-July, bank stock performance for 2018 was lackluster at best. The broad market, as measured by the S&P 500, has climbed nearly 4%, while the stocks of major banks are in negative territory. Wells Fargo stock, for example, is down 1.20% and Citigroup stock has dropped 2.20% so far this year.

Stocks of large banks have underperformed the broad market this year.

That’s very different than last year. Between the presidential election at the end of 2016 and year-end 2017, the KBW Nasdaq Bank index soared 42%.

Strength on Several Fronts

But good news might be on the horizon for bank investments again. Earnings are expected to be very strong when quarterly results come in.

If earnings do rise, the combination of climbing earnings and share prices dropping or remaining flat will make price/earnings (P/E) valuations, a key metric of stock valuation, very attractive. Low valuations may cause stock investors to become interested in bank investments again.

Loan growth overall has started to rise after falling in 2016 and 2017. Business loans, in particular, have been slow for two years, but have recently rebounded.

Many observers don't expect bank stocks to be hurt by yield curve flattening.

Will the Yield Curve Hurt?

But investors might also be shying away from bank stocks because of a fear of yield curve flattening. The yield curve flattens when the difference in the yields between shorter- and longer-term Treasury bonds becomes smaller.

In periods of flatter yield curves, bank earnings on loans, securities, and assets linked to longer-term Treasuries fall compared to the results during periods of greater yield curves.  The business of a bank paying depositors short term interest vs. lending at longer terms becomes a thinner spread.

A flatter yield curve also is thought to indicate rocky times for the economy at some point ahead. Some observers, however, believe that yield curve won’t be an issue for bank stocks. 

Although a flatter yield curve can mean banks will see lower profits on loans and securities, the difference in short-term rates has a greater impact on banks' results. 

Consider that a great number of business loans are tied to the London interbank offered rate (Libor). That benchmark has climbed much higher than the interest rates banks pay their depositors, so banks are profiting.

Goldman Sachs analysts are among the observers who believe the yield curve flattening concern is “overstated,” because, according to the Wall Street Journal, approximately 66% of banks price off the yield curve’s short end, not the differential.

How a Loan Sale Advisor Can Boost Business

In a period of rising interest rates and potential yield curve flattening, banks need to make sure their portfolios are geared for maximum profit. Is your institution looking to buy short-term loans with high FICO and good yields? Contact Garnet. We have several portfolios that meet those requirements. 

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