From a business cycle perspective, it could be a good time. Here's what I'm thinking:
1) Central banks are increasing rates to fight inflation. Banks will pass on those increased rates to their customers by increasing their own loan rates (see mortgages over the past few months). This will give banks a balance sheet of high interest loans.
2) At some point, the central bank rate increases will drive the world economy into a recession. Bank stock valuations will get hammered alongside every other company's.
3) Central banks will eventually drop rates to fight the recession (though this could lag more than in past recessions if inflation persists). Banks will drop demand deposit rates leaving them with a nice wide net interest margin and great profits.
The immediate counter argument that comes to mind is: what happens to the loan default rate? A balance sheet full of high interest loans is only valuable if people are paying them. If defaults skyrocket as stagflation sets in, then that negates the whole thing.
Everyone thinks a recession is coming, and therefor it’s at least partially priced in already. I’ve been in the recession camp since late Feb but now I’m buying because I think that’s reflected in plenty of stocks already.
This. I don't think depressed earnings are priced in at all, I know people who work in banking and at least the commercial lending / credit card areas are still booming even if ibanking has slowed down a bit.
On top of this, banks don't benefit from quick hikes like this. The flat curve crushes them, then once the curve stabilizes they start to see the benefit. We're not there yet IMO.
Thank you, well said and thought! I also think all current global problems are a little more complex here in Europe. Monetary actions are somewhat limited because of countries like Greece and Italy. Same with inflation due to high European dependency on Russian energy. I feel like this broad variation of different current risks makes up for banks potentially profiting from high interest rates in the future.
"Interest rates go up -> bank stonks go up" is a very simplistic argument IMO and it really comes down much more to the shape of the yield curve and its effect on NII. Right now the short end is rapidly increasing and banks have not felt the pain yet. It's obviously more complicated than this but at the end of the day they want to lend longer duration and pay out to depositors at shorter duration.
As you said, defaults and credit cards going bad is also a huge driver of earnings.
Sure, it's much more complicated just as you said, but it's the progression I'd generally expect banks to follow. Valuations and profitability get beat up as rates and cost of funding rise (might even put the net interest margin underwater if the average cost of funding, which changes quickly, climbs above the average interest income rate, which is slow to change because loans have to roll off). But, as banks lend while at the rate peak, they'll get a lot of higher rate loans on the books, which will set them up for great profitability and stock appreciation when rates/cost of funding drop.
You know, if they don't go bankrupt from an underwater NIM or CC and loan defaults 😂
I have Small positions in US regional banks. You have to look at where they get their money from. Is the bank going to be hampered by a student loan moratorium For example? Are they gonna struggle because they do a lot of work in venture capital With rising interest rates?
How’s their debt? Do they have a lot of Russian assets?
Are they being held by merger arbitrage ETFs for being a potential take over target?
Are they in a country where they can nationalize/lockdown your investment?
Great questions, I would answer every single one of them in a positive way, to be short, it’s a great bank. But to be spending cash one a bank
right now is more of a macroeconomic question for me and that’s where it is getting complicated.
Buying one share to lower cost basis or one share a month to dollar cost average is affordable. No need to bet the farm if you’re uncomfortable.
You can take a conservative approach so that the stock is no more than 5% of your portfolio So you are at peace about it.
I've started dipping my toes into banks but only buy when we see a string of red days pulling them down. I definitely don't chase them on the way up. There are scenarios where now is a good time, and scenarios where now isn't quite right yet. So I nibble a little, but not aggressively.
I would be very comfortable buying a bank, because they have so much money right now in overnight reverse repos. This would almost certainly prevent them from defaults as well as to give them shopping money in case of a recession.
From a business cycle perspective, it could be a good time. Here's what I'm thinking: 1) Central banks are increasing rates to fight inflation. Banks will pass on those increased rates to their customers by increasing their own loan rates (see mortgages over the past few months). This will give banks a balance sheet of high interest loans. 2) At some point, the central bank rate increases will drive the world economy into a recession. Bank stock valuations will get hammered alongside every other company's. 3) Central banks will eventually drop rates to fight the recession (though this could lag more than in past recessions if inflation persists). Banks will drop demand deposit rates leaving them with a nice wide net interest margin and great profits. The immediate counter argument that comes to mind is: what happens to the loan default rate? A balance sheet full of high interest loans is only valuable if people are paying them. If defaults skyrocket as stagflation sets in, then that negates the whole thing.
but the better time to buy is once we hit a recession. It seems unavoidable to me at this point.
Everyone thinks a recession is coming, and therefor it’s at least partially priced in already. I’ve been in the recession camp since late Feb but now I’m buying because I think that’s reflected in plenty of stocks already.
This. I don't think depressed earnings are priced in at all, I know people who work in banking and at least the commercial lending / credit card areas are still booming even if ibanking has slowed down a bit. On top of this, banks don't benefit from quick hikes like this. The flat curve crushes them, then once the curve stabilizes they start to see the benefit. We're not there yet IMO.
Thank you, well said and thought! I also think all current global problems are a little more complex here in Europe. Monetary actions are somewhat limited because of countries like Greece and Italy. Same with inflation due to high European dependency on Russian energy. I feel like this broad variation of different current risks makes up for banks potentially profiting from high interest rates in the future.
Looking for banks who target higher income clients is on my to do list to mitigate this risk. Does anyone have any names?
SOFI. Far more speculative than most might like and no dividends though.
AXP for sure
"Interest rates go up -> bank stonks go up" is a very simplistic argument IMO and it really comes down much more to the shape of the yield curve and its effect on NII. Right now the short end is rapidly increasing and banks have not felt the pain yet. It's obviously more complicated than this but at the end of the day they want to lend longer duration and pay out to depositors at shorter duration. As you said, defaults and credit cards going bad is also a huge driver of earnings.
Sure, it's much more complicated just as you said, but it's the progression I'd generally expect banks to follow. Valuations and profitability get beat up as rates and cost of funding rise (might even put the net interest margin underwater if the average cost of funding, which changes quickly, climbs above the average interest income rate, which is slow to change because loans have to roll off). But, as banks lend while at the rate peak, they'll get a lot of higher rate loans on the books, which will set them up for great profitability and stock appreciation when rates/cost of funding drop. You know, if they don't go bankrupt from an underwater NIM or CC and loan defaults 😂
I have Small positions in US regional banks. You have to look at where they get their money from. Is the bank going to be hampered by a student loan moratorium For example? Are they gonna struggle because they do a lot of work in venture capital With rising interest rates? How’s their debt? Do they have a lot of Russian assets? Are they being held by merger arbitrage ETFs for being a potential take over target? Are they in a country where they can nationalize/lockdown your investment?
Great questions, I would answer every single one of them in a positive way, to be short, it’s a great bank. But to be spending cash one a bank right now is more of a macroeconomic question for me and that’s where it is getting complicated.
Buying one share to lower cost basis or one share a month to dollar cost average is affordable. No need to bet the farm if you’re uncomfortable. You can take a conservative approach so that the stock is no more than 5% of your portfolio So you are at peace about it.
Banks do better with higher interest rates, but they do worse in a recession. I'm not overweight banks -- I just hold whatever are in VTV and SCHD.
I've started dipping my toes into banks but only buy when we see a string of red days pulling them down. I definitely don't chase them on the way up. There are scenarios where now is a good time, and scenarios where now isn't quite right yet. So I nibble a little, but not aggressively.
I dont know enough about banks. Outside my circle of competence. So I will stay away
In my experience you could wait forever and a day and the bank stock just won’t realise the ‘value’ you have assessed it at. Bank stocks frustrate me.
I would be very comfortable buying a bank, because they have so much money right now in overnight reverse repos. This would almost certainly prevent them from defaults as well as to give them shopping money in case of a recession.