Global banking stocks are on track to record their best year since the wake of the financial crisis, benefiting from expectations of higher borrowing costs as rate setters battle widespread inflation.
An MSCI benchmark that tracks global banking stocks – measured in US dollars – has jumped around 30% so far in 2021, a stronger performance than the provider’s all-sector gauge rise of around 20%. of clues.
Banks haven’t made such gains since 2009, when the same MSCI stock index rose more than a third as lenders recovered from the depths of one of the worst crises to hit the financial sector. .
U.S. banks in particular have been boosted by healthy volumes in their trading business in recent months, along with “extraordinary” advisory activity and the release of reserves built up to cover bad debts, said Scott Ruesterholz, portfolio manager. funds at Insight Investment. “It’s a phenomenal environment in which to operate.”
A KBW index focused on U.S. banks has climbed more than two-fifths this year, positioning it for its best annual performance. This improvement stands in stark contrast to 2020, when the same index fell around 14% as the pandemic prompted central banks to cut interest rates to record lows, compressing the difference between interest rates that banks charge their customers for loans and those they pay on customer deposits.
The performance of banks around the world diverged over a longer period, with the United States far outpacing Europe. On a five-year basis, an MSCI index focused on US banks is up more than 60%, while its European equivalent (priced in dollars) is down 2%.
Banks tend to follow moves in 10-year U.S. Treasuries, said Beata Manthey, equity strategist at Citigroup, who expects benchmark government bond yields to hit 2% at the turn of the year – down from their current level of around 1.6 percent. Bond yields move inversely to prices.
Mark Haefele, chief investment officer at UBS, noted that with energy stocks, “financials do well after a rally, but if there’s excessive inflationary pressure, they may as well do well.”
The U.S. consumer price index, a key gauge of inflation, rose 6.2% in October from the same period a year earlier, marking its fastest rise since 1990. Inflation in the UK hit 4.1% in the same month, according to data released last week.
In turn, traders are now betting that the Bank of England will raise borrowing costs to 0.25% in December, from their current level of 0.1%, after the BoE’s surprise decision to hold the stable rates this month.
Subsequently, the markets take into account “maybe [0.75 per cent] 1% interest rate” in the UK by the end of next year, said Alex Wright, fund manager at Fidelity. Such a scenario would boost British retail bank NatWest’s profits by 24%, he said, while adding 12% to Lloyds’ profits and 8% to Barclays’s.
An increase of 1 percentage point [at the ECB and the Fed] would similarly boost US bank profits by 17% and European profits by a quarter, according to Stuart Graham, an analyst at Autonomous Research.
These forward-looking increases have bolstered analysts’ optimism. Half of investors polled by Bank of America this month said they were overweight European banks, the highest proportion on record, based on data dating back to 2003.
Bill Nygren, chief investment officer for US equities at Harris Associates, is optimistic that bank stocks will continue to rise, albeit from a low base. “We came down a long steep hill and now we had this little rally up a bunny hill,” he said. “But we think ‘normal’ could be a bit higher than today.”