Should investors bet on improving US bank stocks?
IIn this article, US investment manager Direxion analyzes the fourth quarter results of the US banking sector since the start of the year.
2021 has been a fickle year so far for major banks in the United States.
The JPMorgan group [JPM], Citigroup [C], Bank of America [BAC], Goldman Sachs [GS], Wells Fargo [WFC], and Morgan Stanley [MS] for the most part, fourth quarter earnings and revenue above analyst consensus estimates, in line with the long-term trend.
This time around, only Bank of America, Wells Fargo and Citigroup ranked below revenue estimates – and just so. And yet, financial savvy people know what usually happens next: The banks are showing weakness.
While each of the banks still outperformed the S&P 500 for the year at the end of January, they were all down since their reports. It’s a familiar refrain to financial enthusiasts, who have come to expect profits to be a “buy the rumor, sell the news” event. Unsurprisingly, this short-term rotation benefited financial bulls.
Direxion Daily Financial Bear 3X shares [FAZ] was down almost 19% in the 30 days to January 27. Likewise, Direxion Daily Financial Bull 3X shares [FAS] increased by roughly the same amount during this period.
Renewed interest in regional
Moving down the scale of market capitalization, the action of regional banks has eclipsed that of its national counterparts.
Much like the big banks, most regional banks reported superior fourth quarter earnings, including First Republic Bank [FRC], PNC Financial Services [PNC] and Citizens Financial Group [CFG]. But while the fundamental story between the two groups is similar, the trade action is not.
Le Direxion Daily Regional banks Bull 3X shares [DPST] has grown 128% in the last three months (through Jan. 27) and since the start of the year it has registered more than $ 28 million in admissions.
The performance of regional banks can again be attributed to increased account activity, with PNC Financial Services reporting large deposits and, like its larger counterparts, additional capital that was previously set aside for a potential loss on ready.
The enthusiasm represents a decisive change in fortunes for regional banks, which, even more than the big banks, have been drastically lagging the market for most of 2020.
Of course, these small financial firms also carry the same risk of a wave of defaults as the big banks. In addition, the incomes of these small institutions are also handicapped by the current environment of low interest rates which reduces their ability to generate income through loans or the holding of rate sensitive assets.
This question of interest rates, along with the broader question of the current national macroeconomic situation, will likely determine how long this banking rally can last.
Right now, the banks appear to be in a relatively healthy financial position, all things considered. Loan losses do not appear to be as large as expected, and several have even mentioned the resumption of buybacks.
Despite Wall Street’s optimism (what some would call overly optimistic) over the past six months, its optimism towards the banking sector appears to be on solid ground.
This item was originally published in Direxion’s Spotlight newsletter on January 27.
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