https://ift.tt/a5LQwUS. Banks Outlook Positive With Rate Hikes And Loan Growth Coming Up – Cryptovibes.com – Daily Cryptocurrency and FX News

Investors and analysts see accelerating loan growth and Federal Reserve interest rate hikes boosting the sector although U.S. banks had a rocky start to the year.

Consumer spending, which is encouraging companies to build inventories and, in turn, has increased demand for business loans, was stimulated the U.S. economic recovery. After weakening during the pandemic, the net interest income – the difference between the rates banks charge for loans and what they payout for deposits – is expected to change in 2022 with interest rate increases, which is aimed at being used by the Fed to help tame runaway inflation.

As investors at firms including JPMorgan (JPM.N) were sent fleeing by the weak trading revenue and rising expenses, the S&P 500 bank index (.SPXBK) tumbled 15% from its record high last month after rallying in 2021 and early 2022.

The recent flattening of the curve has added to investor worries, since bank lending profits depend on a steepening yield curve, with the difference between U.S. 2-year Treasury yields and 10-year yields hitting its narrowest level since November 2021.

In 2021, traders have been relying on an increasing number of rate hikes, as inflation has surged.

According to Mike Cronin, investment director at asset manager abrdn in Boston, banks’ share price declines display worries investors and the Federal Reserve. Hence, the Fed may “hit the brakes a lot harder” than originally expected and end up hurting the economy, despite higher rates favoring them.

Cronin mentioned:

“Expenses were an issue in the fourth quarter but we’ve set the bar on that. 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.”

Bank stocks have recovered dramatically, compared with March 2021, when they traded at 6.8 times earnings expectations for the next 12 months. But the S&P’s 19.5 multiple is still slackened by the S&P bank index’s current price/earnings ratio of 12.9.

The sector looks cheap to KBW’s director of research, Matthew Kelley, with the KBW regional bank index (.KRX) currently trading at around 70% of the S&P 500’s multiple compared with its more typical 90% level.

While citing loan growth and rising rates, Kelly said:

“The fundamentals of the banks are actually strengthening.” While profits have been hurt by higher expenses, he sees “more than enough positive things happening with the banks on the top line to offset this.”

A flattening yield curve, which was the result of fears about the economy that he expects will prove transitory, has been exacerbating recent selling in bank stocks, according to Kelly. After a stronger than expected jobs report provided some reassurance about the economy, bank stocks, as if on cue, rose more than 2% on Friday, their biggest one-day gain since January 6.

According to Refinitiv, quarterly earnings per share are expected to decline at the biggest U.S. banks in 2022. Banks were able to release unused reserves last year, which artificially inflated earnings last year, after setting aside extra loan loss reserves in 2021, making a tough comparison between 2021 and 2022 earnings.

Analysts say bank stocks do not fully reflect these expectations although investors have been betting on Fed rate hikes for some time. In the 2016-2018 Fed tightening cycle, it was not until 21 months after the policymaker started raising rates that bank stocks peaked, KBW’s Kelley notes.

Piper Sandler analyst Jeffery Harte said:

“Conceptually it’s priced in but quantitatively there’s potential for more upside.”