On Friday (12th) US time, Big Bank of America will be the first to kick off the financial reporting season. After the overall rise of 23% in US banking stocks in the fourth quarter of last year, recording the best quarterly increase since 2021, the market is particularly concerned about the latest financial reports of major Wall Street banks and how their executives view the US economy and institutional profit prospects. Banking stocks will also face a high-risk profit battle.
US bank stocks recorded their best quarterly increase since 2021 in the fourth quarter of last year
According to data compiled by the media, the KBW Bank Index, which measures the overall trend of US banking stocks, rose 23% in the fourth quarter of last year, outperforming the overall market.
Bank stocks in the US faced pressure for most of 2023, followed by a surge in late October last year as the market began to bet that the Federal Reserve would end its aggressive rate hike cycle and cut interest rates several times in 2024. This expectation eased concerns about areas such as bank net interest margin, and the trend of bank stocks immediately reversed. The current focus is on the timing of the Federal Reserve's interest rate cut, and investors will carefully evaluate what this means for various financial indicators such as the health of Wall Street's loan portfolios and the prospects of deposit rates.
David Bianco, Chief Investment Officer of DWS Group in the Americas, stated: "Most large banking stocks experienced a strong rebound at the end of last year, thanks to market optimism that due to the Federal Reserve's interest rate cut expectations, the risk of a US economic recession has been greatly reduced, and banks' profitability will no longer be significantly impacted. Currently, the risk of large banks having to set aside large loan loss provisions or being forced to write down securities is much lower than last year."
However, before the financial report was released, the KBW Bank Index fell by about 1% on Thursday (11th), underperforming the overall market.
New quarter financial report season attracts attention
JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo Bank will be the first to release their financial reports on Friday. Following closely behind, next Tuesday (16th), investors' attention will shift to the profitability of Morgan Stanley and Goldman Sachs in the fourth quarter of last year. On the same day, PNC Financial Services Group will also become the first regional bank to release its financial report for the fourth quarter of last year.
Analysts predict that due to rising financing costs, Dahang's performance in the fourth quarter of last year will generally be sluggish. Goldman Sachs analyst Richard Ramsden stated in a report that the banking industry's net interest income is expected to decline, while increased expenses and weak trading revenue may also affect its earnings. However, he believes that loans may increase moderately.
The market will also pay attention to the payments made by these large banks to the Federal Deposit Insurance Corporation (FDIC). Due to last year's regional banking incident, the six largest banks in the United States were required to pay fees to the FDIC to help supplement the US government's deposit insurance fund. After the initial payment, the FDIC announced a deposit insurance fund supplementary plan later last year, stating that institutions with assets exceeding $50 billion would pay 95% of the fees, while institutions with assets less than $5 billion would not need to pay. Citigroup announced on Wednesday that it expects the cost of paying this additional funding to be $1.7 billion. Bank of America stated that it will pay $1.6 billion in fees related to the transition to the London Interbank Offered Rate (Libor).
Lansden is quite optimistic about the performance of bank stocks after the latest financial report. "Bank stocks are clearly not as cheap as before. However, at the same time, investors have not yet considered banks to be overvalued." He said, "If the net interest income, loan growth, capital markets, and deposit pricing data released by banks are more optimistic than expected, all of these will clearly bring greater returns to banks and may further surpass their previous performance."
Citigroup's data also shows that the financial industry has been the only industry in the past month where most analysts have raised their earnings expectations. Banker stated that due to the strong profitability of JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, he maintains an "overweight" rating on large bank stocks. "Credit has remained stable, offsetting a significant decrease in global transaction matching fees, and the recovery of the initial public offering (IPO) market has also made the profit prospects for banks brighter," he said.
However, many analysts suggest that investors lower their expectations for the bank's financial report and their enthusiasm for investing in bank stocks. James Fotheringham, an analyst at BMO Capital Markets, downgraded the ratings of some US bank and professional finance company stocks against the backdrop of a rebound in banking stocks, warning that they appeared vulnerable to the "upcoming" credit cycle. Coincidentally, Erika Najarian, an analyst at UBS Group, also warned of the risk of "drastic fluctuations in investor sentiment.". He wrote in a report this week, "The January financial reporting season may become a decelerator hindering the recent momentum of bank stocks."
The latest December Consumer Price Index (CPI) released by the US Department of Labor yesterday (11th) increased by 3.4% year-on-year, an expansion from the previous month's 3.1% increase; The month on month increase was 0.3%, an increase of 0.2 percentage points from November last year, and also higher than the market's general expectations.
Morgan Delledonne, Director of European Investment Strategy at Global X ETFs, told First Financial reporters that overall, the CPI data was mixed, with core inflation slowing down while overall data rebounded and remained unchanged. Federal Reserve fund futures still show interest rate cuts of 5 to 6 times this year, twice the forecast of the Federal Open Market Committee (FOMC). The inconsistency between the Federal Reserve and the market on interest rate prospects may continue into the first quarter as both sides are waiting for more data to confirm their views.
According to data compiled by Bank of America, hedge funds have been selling financial stocks over the past four weeks, with an average weekly outflow of $200 million. Not only hedge funds, but also institutional investors and retail investors are net sellers.