Q1 earnings season preview: US bank stocks under pressure as costs weigh

  • The rally in bank stocks has lost momentum this year on growth concerns
  • Lenders are also facing cost pressures that are hurting their margins
  • Despite these risks, some analysts see value in some top banking stocks, advising clients to buy on downside

Earnings from some of the largest US banks, including JPMorgan Chase (NYSE:), Goldman Sachs (NYSE:) and Citigroup (NYSE:), may show that rising cost pressures are hurting margins at these multinational financial institutions despite the boost of higher interest rates.

Investors sold bank stocks amid signs that financial powerhouses on Wall Street, which have driven earnings to record highs, have begun to cool down. The benchmark, which tracks 24 of the largest U.S. lenders, has lost more than 18% since its Jan. 12 peak.

KBW Weekly TTM banking index

Over the same period, the index has fared much better, falling around 5%.

The underperformance comes after a powerful rally in 2021 when the KBW banking index rose 35% as investors bet the Federal Reserve’s drive to raise interest rates would benefit lenders’ bottom lines.

But that rally has lost momentum this year as concerns mount that the Fed’s aggressive monetary tightening to combat – now at a 40-year high – could push the economy into a recession, reducing demand credit and other financial services.

In addition, January’s fourth-quarter results also fell short of high expectations, as many banks warned that spending would continue to rise this year, which would hurt margins. JPMorgan, whose shares have fallen more than 20% since January 12, told investors in January that they were up 11% from a year earlier. The largest US lender, which reports Wednesday before the market opens, expects spending to rise 8.6% in the first quarter.

JPM Weekly TTM

Citing inflation and the amount JPMorgan plans to spend on investments, executives told investors the bank is “for a few years of under-target returns.”

Loan growth returns

Goldman Sachs, which reports first-quarter results on Thursday, spent an additional $4.4 billion in compensation last year, sending the bank to its only for the year. Citigroup also spent more on compensation in the last quarter of the year, causing a 26% decline.

Banks have raised salaries for junior Wall Street bankers in 2021, and corporations are also paying to retain senior executives.

Despite the latest sell-off, we don’t believe banks will be a dead investment for investors in 2022. Loan growth, though facing headwinds from geopolitical uncertainty and higher inflation, is rebounding and could accelerate if economic momentum and job gains remain strong.

Borrowing from the 25 largest U.S. companies has increased for seven straight weeks, with lending 5.8% higher in mid-March than it was a year earlier, according to Federal Reserve data.

Borrowing accelerated at the end of 2021, and this trend could continue as consumers spend their stimulus money.

Companies, struggling to maintain cash flow amid supply chain bottlenecks and labor shortages, will also increase borrowing to increase inventory. For these reasons, some analysts are advising investors to take advantage of price weakness in some leading bank stocks.

BAC Weekly TTM

Bank of America (NYSE:) said in a note to clients last week that it sees a “unique” backdrop heading into JPMorgan’s earnings later this month. His note adds:

“Equities have historically traded poorly following earnings announcements, but we view the current backdrop as unique in terms of investor sentiment, a material change in the rate outlook and the potential for a better-than-expected update. dreaded on customer behavior.”

Wells Fargo analysts in a recent note picked Bank of America as their favorite stock, saying the financial company can manage headcount and expenses while earning more from loans.

Conclusion

The next earnings season for banks could prove mixed for investors as these lenders struggle to contain costs in an inflationary environment. Overall, however, the environment remains supportive for banks, especially as the Fed hikes rates aggressively. Additionally, there are signs that businesses and consumers are ready to start borrowing again.

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