After a solid New Year's rally, top US banks will begin reporting their fourth quarter earnings on Friday. Investors remain optimistic that higher interest rates and recovering demand for credit will drive further earnings growth.
The benchmark, which tracks 24 of the largest US lenders, is making its best annual start in more than a decade, rising more than 11%. This enviable performance comes on top of the 35% gain the index made last year.
KBW Bank Index Weekly Chart
As it hits its highest level in about four decades, we believe the Fed's increasingly aggressive stance will continue to benefit banking stocks.
Higher interest rates bode well for the industry as banks can count on wider margins on their lending products, including credit cards, lines of credit and credit cards.
As a note to customers from Raymond James last week pointed out:
"Rising rates and accelerating credit growth are the two biggest catalysts for investors to become more optimistic about bank stocks."
Further upside for sector
Of the largest US banks, Wells Fargo (NYSE:), JPMorgan Chase (NYSE:) and Citigroup (NYSE:) will report their fourth quarter results tomorrow, Friday, January 14, ahead of the opening of the US session. . It is expected that the growth momentum will be given more room.
One of our favorite picks from this group, JPMorgan, is expected to report $29.87 billion in revenue and earnings per share of three cents. In the third quarter, JPM came in for deal advice and one of its best-ever results for total investment banking costs.
JPM Weekly Chart
Shares closed at $168.44 on Wednesday after gaining about 6% this year. According to InvestingPro's trading model, the stock's average fair value is $181.88.
Source: InvestingPro
That implies an additional 9% upside potential.
Push in consumer spending
Combined with massive government spending on infrastructure and the gradual phasing out of monetary stimulus, banks could see demand for credit pick up significantly this year as businesses and individuals use up the liquidity built up during the pandemic.
This trend was evident during the third quarter, as customer spending surpassed pre-pandemic levels, a trend that many bank executives saw continue into the holidays. For example, spending on Citigroup's credit cards rose by 20% from to a record. While most analysts agree that banks will live up to expectations for faster credit growth, the spread of the Omicron variant could dampen lending in the coming years. short term.
According to a recent note by Wedbush in a Bloomberg report:
"First quarter loan growth may accelerate from the impact of the Omicron variant, but we expect growth to resume an upward trajectory through the remainder of 2022."
Bottom Line
After their impressive start in 2022, banking stocks continue to look attractive, with many macro trends continuing to support their businesses.
JPM remains our preferred choice for the financial sector due to its diversified portfolios and stronger balance sheets. In our view, any weakness after earnings should be viewed as a buying opportunity for long-term investors.
