Investors are starting to heat up for US bank shares, after shying away from financial institution stocks this year, over concerns that one of the worst recessions in US history will crush profitability and lead to increasing loan losses. Near-zero interest rates in the near future are equally harrowing.
But after remaining depressed during the pandemic-driven economic downturn, the stocks of the largest banks gain momentum in hopes that the worst is now over for these lenders.
It has increased by more than 12% in the past five trading days.
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With these increases, the index is still down 31% this year. However, it is much higher than the low of March 23, when it fell about 50%.
Individual lenders were under some pressure.
JPMorgan Chase & Co. For example, (NYSE 🙂 saw its earnings drop 69% as the company set aside $ 8.29 billion for bad loans – the largest provision in at least a decade – to deal with the effects of the corona virus. pandemic on the economy. Wells Fargo (NYSE 🙂 earnings per share to just 1 cent and it reserved more money for credit losses.
Other reasons investors have been wary of US banks are the possibility of low interest rates over a longer period of time, as the Fed is lifting the corona-hit economy out of recession. But as the US and other countries begin to open their economies, some investors are betting that the worst is over, so now is a good time to sniff down the downtrodden bank stocks that have become relatively cheap compared to other sectors.
Fear Of Dividend Cuts
A major fear that weighed heavily on bank shares during this recession was their ability to continue paying dividends when the economy is in such a bad condition. The Federal Reserve received heavy criticism after the 2008 financial crisis for failing to stop banks from distributing dividends to their shareholders, despite the fact that some of these institutions later collapsed.
Policymakers have not prevented banks from paying dividends in this latest crisis, but large banks have voluntarily suspended share buybacks. This indicates that cutting their dividends would be a last resort as this could indicate to investors that the company is in a bad financial condition.
"I don't think this should be done right now," Fed Chairman Jerome Powell said during a Brookings Institution webcast on April 9. "We will see how things evolve, but I don't think this step is appropriate at the moment."
Another factor that helps soothe investor fears is that, thanks to regulatory changes after the crisis, banks have more capital to deal with difficult times than before the 2008 financial crisis.
Jamie Dimon, Chief Executive Officer of JPMorgan, expressed confidence in mid-April, when prospects were even more uncertain than today, that the largest US bank can handle "really adverse effects."
With the risk that dividends will be eliminated for the time being and the economy is showing signs of rebound, banks have become a legitimate target for value investors.
Bottom Line
Despite recent optimism, investors should note that earnings growth for these lenders will not return so quickly. They are likely to face some very ugly neighborhoods against the background of widespread and closed small businesses on the high street.
That said, long-term investors were able to pick out some solid banking stocks. For such investors, we love JPM and Citigroup (NYSE 🙂 for their diversified portfolios and stronger balance sheets.
