On the one hand, the interest rate increases are expected to contribute to the income of the big banks and lenders, and indeed they are. On the other hand, the fears of recession and financial economic slowdown keeps investors away from the banks, in response, they issued good reports regarding the outlook and the challenging period, and perhaps now, after the declines – there is a place for the financial sector in the investment portfolio.
JP Morgan, the largest bank in the US, reported that the bank’s net interest income jumped 34% thanks to the increase in interest rates. Until now, investors were not sure how much the banks really benefited from the interest rate hike, and this publication by JP Morgan, encouraged them and caused JP Morgan on the day of the release of the report to finish higher while the entire market was red.
For the near term, investors will want to focus on banks that are more sensitive to interest rates, that is, those that will see the largest increase in Net Interest Income (NII) This will be the figure that in the near term investors will try to look for and select those stocks “with tweezers”.
Conversely, investors will have to be wary of banks that are overexposed to the segment the issuances, and the banks that a large part of their income is exposed to income from trading and carrying out transactions. Why? These 2 segments are the segments that are vulnerable to interest rate increases. The issuance market in 2022 weakened and dried up, with almost no substantial issuances, and the banks that were excessively exposed or “relied” on the proceeds from the issuances – were harmed. In addition, investment banks, which are exposed to high trading revenues, also saw a substantial decrease in revenues due to the little activity of investors during such a period of declines.
Financial sector stocks are cheap now relative to history, aren’t they?
Bank of America is trading at a P/E of 10, while the average over the past 5 years is 14. JPMorgan is trading at a P/E of 9.4, while the average over the past 5 years is 13. Goldman Sachs’ P/E is on 6.8, while the average is 10. Meaning, the shares of banks and investment banks are now trading short due to the declines in the markets in the last year.
In contrast to the profit multiplier, the banks’ capital multiplier, which is the more common multiplier in this sector, is more or less at the historical average, around 1.1. So in terms of profits, it is a question of underpricing, in terms of balance sheet capital and “book” value, bank shares are still not cheap, which opens up the option for continued declines.
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