As for U.S. bank shares in 2022, much will be accompanied by lending growth and rising rates.
Wall Street’s strong performance in 2021 boosted the KBW Banking Index. It climbed more than 37 percent this year, about 10 percentage points more than the S&P 500. Shares in JPMorgan, Goldman Sachs and Morgan Stanley all set new highs this quarter. Even scandal-ridden borrower Wells Fargo enjoyed a wild stock market rally. Its share price has risen by more than two-thirds.
With the exception of Citigroup, the six megabanks all trade at far above their book values. Yet this industry still has room to run, assuming that old-fashioned lending and interest rates could rise at the same time.
The US Federal Reserve is expected to start raising interest rates next year. Fed fund futures currently price up to 75 basis points of increases until the end of 2022, and around 150bp by the end of 2023.
Higher rates should boost net interest income – the money banks make from the difference between deposit rates and loan rates. According to analysts at Oppenheimer, only two quarter-point rate hikes will amount to a 5 percent increase in net interest income.
It is predicted that consumers and companies will start borrowing again in 2022 after almost two years of lukewarm to negative loan growth. For banks that are flooded byna $ 4.5tn in deposits since the beginning of 2020, it can not come soon enough.
That said, there may be room for disappointment. S&P Capital reckons excess liquidity will remain above $ 2.9tn, even as the economic recovery continues. Some banks – such as Bank of America – have already taken a more aggressive approach by using the excess cash to buy higher-yield treasuries and mortgage-backed securities.
This means that banks will also have to reduce costs. Otherwise, they will still experience the negative impact of interest rates. A proper economic recovery cannot come soon enough for US banks.
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