It’s common knowledge that after POTUS Trump was elected, bank stocks sky rocketed between November 2016 and December 2017, having gained 42% which was more than S&P 500 index gain of 15%. However, in 2018, the trend reversed where the banking sector saw a decline of 2.6 percent as against the gain of 3.7 percent by the S&P. The initial policy decisions of tax cuts, deregulation along with interest rate hike and sound economy, boosted the bank stocks.
On one side, the sector enjoyed good prospective earnings due to rise in interest rate (as banks tend to earn more interest income on loans), the trade war and tariff issues between US and China have not gone down well with the Wall Street and the investors. The Chief Investment Officer of Princeton Asset Management, Mr. Adam Falcon, also brought out aspect of slowing of economy in case of the US-China commerce feud. He further opined that if the tiff intensifies, there would be reduction in business confidence and the commercial activity will slow down. The path presently being chosen by the two countries does not look promising as US announced a major increase from taxing $34 billion imports last week to additional $200 billion this week.
Challenges Facing Bank Stocks
While most sectors are likely to be affected by the economic slowdown, the bank stocks would take the major hit and the uncertain situation is driving the investors to safe investments like long-term Treasury bonds. The banks usually borrow money at short-term rates and lend at long-term rates, therefore higher rates for long term would be preferred by the banks in order to make money. The earning potential would reduce if the investor jumps to 10-year treasury bonds for example.
Each institution is expected to have higher earnings as compared to last year as per Wall Street analysts. JP Gravitt, the market strategist and CEO for Market Realist said that the bank stocks would have healthier second half of 2018 if they are able to surpass the revenue expectations in the forthcoming earning period, especially because the sector has lagged behind the market in 2018.A usual gauge of short- versus long-term rates is the range between two-year and 10-year Treasury bond. This has reduced significantly over the last 30 months but the good news is that a higher rate benefits everyone.
The Pros and Cons
Robert R. Johnson from Fed Policy Investment Research Group stated that there is a strong likelihood for interest rate to increase rather than decrease in future. The expectation is a rise by 25 basis points apiece by Federal Reserve twice in 2018 and further three times in 2019 if economy continues to be as strong. And by all estimates, if the economy keeps looking bullish, then industry experts say that three more hikes in rates (of 25 points) are quite likely.
Something that gives bank stocks a huge push is the fact that their valuation levels are low. Wells Fargo, US Bancorp and Bank of America stocks are being sold for ‘8x and 12x forward earnings’. When compared to some soaring (and massively popular) stocks like Netflix and Amazon, (with Netflix fetching 80x – 90x forward earnings and Amazon with 200x trailing earnings), it’s a real downer to investors as the big banks are expensive and seem to be in a mood to not do anything about it.
It’s a duck if it walks like one?
When something seems too obvious and staring us right in the face, be wary, for it may not appear so obvious after all. There are, of course, risks involved when one purchases bank stocks too, and if their 9-year bull climb on Wall Street is any indication, a tumble downwards is inevitable. The cliché of ‘what goes up, must come down’ rings true here. The deregulation of finances of this sector could serve as a booster, but certain detrimental factors such as lax oversight, bad actors and loose lending standards can poison any progress in the economy. So expecting a downturn, anywhere and any time is a wise move. A well-prepared and informed individual investor can definitely manage this risk. In sprite of the sudden burst of overachievement, the stock industry prices are pretty reasonable with some calling it a ‘bargain bin’, more so after the first 6 months of 2018 experiencing pull backs.For now, it’s all clear weather and sunny skies.
FAQs
Bank stocks can offer strong returns in the right environment, but they can also add risk to a portfolio.
What are the best bank stocks to buy right now? ›
More Collections >
| Name | Price | ROE |
|---|
| HDFC Bank Ltd | ₹1,642.55 | 16.88% |
| ICICI Bank Ltd | ₹1,241.15 | 17.48% |
| State Bank of India | ₹876.80 | 18.81% |
| Axis Bank Ltd | ₹1,282.50 | 17.98% |
8 more rows“If we see the interest rates drop and that alleviates some of the pressure on defaults, that will be positive for them. It will also indicate they are trying to stimulate the economy, which will also be good for them,” White said.
How to evaluate banking stocks? ›
Because banks have unique attributes, certain financial ratios provide useful insight, more so than other ratios. Common ratios to analyze banks include the price-to-earnings (P/E) ratio, the price-to-book (P/B) ratio, the efficiency ratio, the loan-to-deposit ratio (LDR), and capital ratios.
Do bank stocks do well in recession? ›
Bank stocks typically underperform heading into a recession. They act as a proxy for the health of the economy. If the market is looking 18 months into the future, they expect a slowdown in activity from the banks. However, once we're in a recession, banks typically outperform.
What is the best Canadian bank stock to buy right now? ›
Comparison Results
| Name | Price | Analyst Consensus |
|---|
| RY Royal Bank Of Canada | C$151.10 | 12 Buy 2 Hold 0 Sell Strong Buy |
| LB Laurentian Bank | C$26.75 | 0 Buy 6 Hold 3 Sell Moderate Sell |
| CWB Canadian Western Bank | C$45.64 | 5 Buy 4 Hold 0 Sell Moderate Buy |
| GSY goeasy | C$190.15 | 7 Buy 1 Hold 0 Sell Strong Buy |
4 more rowsTop Bank Stocks in India in 2024 (as per Market Capitalization)
| S.No. | Best Banking Stocks in India (as per Market Capitalization) | Category |
|---|
| 1. | HDFC Bank Ltd. | Private |
| 2. | ICICI Bank Ltd. | Private |
| 3. | SBI | Public |
| 4. | Kotak Mahindra Bank | Private |
2 more rowsMay 31, 2024
The biggest reason behind the selloff in banking stocks appears to be the RBI's proposal to tighten project financing norms. "The recent pressure on banking sector stocks can be attributed to the RBI's proposal to tighten project financing norms by setting standard asset provisioning of up to 5 per cent on loans.
Will banking stocks recover? ›
Global banks stocks have been out of investors' favor since the onset of the financial crisis nearly a decade ago, but the prospect of rising interest rates, looser regulation, improved credit quality, and stronger global economic growth might put them back on investors' radar screens, observers say.
What will make bank stocks go up? ›
In a broad sense, a bank's share price is affected by the same forces that affect the share prices of other public companies. Major, abstract factors can impact a bank's share price. These include overall market sentiment, expectations about the future, fundamental valuation, and the demand for banking services.
Cyclical stock sectors
The consumer discretionary, technology, real estate, and financial sectors have historically been especially likely to outperform the market when rates fall and earnings rise. Financial stocks look particularly appealing, due to how inexpensive they've recently been.
Why are bank stocks climbing? ›
According to Dave Donabedian, the CIO of CIBC's private wealth division, “sticky money is flowing into the sector for the first time in a long time.” The reasons for this, he says, include investors looking to branch out from the “Magnificent Seven” tech stocks, and because many bank stocks pay juicy dividends.
What are the best metrics to evaluate bank stocks? ›
Common ratios used are the net interest margin, the loan-to-assets ratio, and the return-on-assets (ROA) ratio. Net interest margin is used to analyze a bank's net profit on interest-earning assets like loans, while the return-on-assets ratio shows the per-dollar profit a bank earns on its assets.
What is the best method of valuation for bank stocks? ›
The most sufficient multiples for bank valuation are the price-earning ratio (P/E) and the price-to-book value ratio (P/BV).
How do you research a bank stock? ›
In this story, we have discussed some of the most important metrics that investors need to know while researching a banking firm.
- Capital adequacy ratio (CAR) ...
- Gross and net non-performing assets. ...
- Provision coverage ratio. ...
- Return on assets. ...
- CASA ratio. ...
- Net interest margin. ...
- Cost to income.
Why is it a good time to invest in Canadian bank stocks? As of this writing, it's still a good time to invest in Canadian bank stocks, as analysts predict that the local economy will remain steadfast and avoid a recession. Moreover, Canadian bank stocks are still trading at less than ten times their earnings.
Is it wise to invest with your bank? ›
Disadvantages. Banks don't generally specialize in investing since they are more about savings, day-to-day financial transactions, and loans. That means that a bank might have a more limited pool of mutual fund families—multiple funds managed by the same company—for their customers to choose from.
Is it better to keep your money in banks or stocks? ›
The simple rule: If you need the money in the next three years, then save it ideally in a high-yield savings account or CD. If your goal is further out, or you don't have a specific need for the money, then start thinking about investing in something that will grow more, like stocks or bonds.
Are bank stocks going to recover? ›
The KBW Nasdaq Bank Index rose more than 2% for the day and is up roughly 4% for the year to date. After a bruising 2023 in which bank stocks dropped on multiple occasions and struggled to sustain momentum, lenders' shares have recovered ground in recent months.
