Interactive Investor

The buy case for American bank stocks

19th January 2022 09:01

Rodney Hobson from interactive investor

An improving interest rate environment for banks should make them an attractive investment, but when should you buy? Our overseas investing expert gives his view.

Fourth-quarter results from US banks have been a bit mixed, reflecting the lingering effects of the pandemic that will have continued into the New Year. The big question is whether a gradual return to something like normality, particularly in terms of interest rates, will make life easier as this 2022 progresses.

Recovery in the US economy faltered last month as 199,000 non-farm jobs were added, well short of expectations of about 400,000 and below the number of new jobs created in previous months. This is seen as a vital indicator of how well the US economy is faring, showing how many people were taken on by private employers excluding seasonal distortions in the agricultural sector. 

To add insult to injury, retail sales fell unexpectedly by 1.9% in December after four months of strong growth. Fears over shoppers catching the Omicron variant on top of higher prices and shipping delays, discouraged customers in what is normally the key months in the malls.

The Omicron wave of Covid-19 is expected to restrict job creation in the first two months of 2022, especially as there is a shortage of skilled workers, and the Federal Reserve is unwinding its financial support for the economy. March is widely expected to see the first of several increases in interest rates to cope with inflation hitting 7% last month.

A slowing economy will not help banks but an end to artificially low interest rates certainly will. Rising rates give banks the opportunity to make money by widening the gap between what they pay savers and what they charge borrowers. 

On balance, banks can look forward to this year with confidence that it will be better than 2021 and quite a bit better than Covid-hit 2020. In particular, they will be hoping for continued higher fees from investment banking and further releases of provisions made earlier for bad debts that are no longer considered necessary. 

The biggest negative for investors to watch out for is the extent to which higher operating costs, mainly resulting from significantly higher wages needed to retain staff, are dampening earnings. 

JPMorgan Chase (NYSE:JPM) set the ambiguous tone with results for the fourth quarter showing a 14% drop in net income on revenue only 0.3% lower. Higher salaries and legal expenses took the blame.

This took the shine off a strong 12-month performance, with net income up 66% over 2020 on revenue just 1.4% ahead. With the shares at $151, the yield is 2.41%. interactive investor’s Keith Bowman covered the figures in more detail here.

Source: interactive investor. Past performance is no guide to future performance

The mood was lightened somewhat by Wells Fargo (NYSE:WFC) reporting a 13% rise in fourth-quarter revenue to $20.9 billion, with net income leaping 86% to $5.75 billion. Earnings per share more than doubled to $1.38.

However, the profit figures were flattered by a $943 million net gain on the sales of the Corporate Trust Services business and Wells Fargo Asset Management plus a $875 million reduction in credit losses, only partly offset by a $268 million impairment charge.

Wells Fargo shares have put in a great performance over the past 15 months, more than doubling from $22 to a four-year high of $58. They are currently $56.50, where the yield is only 1%.

Source: interactive investor. Past performance is no guide to future performance

Then Citigroup (NYSE:C) took the shine off the situation by admitting that its operating expenses had jumped by 18%, reducing net income by 26% to $3.2 billion. Total revenue was up just 1% at $17.02 billion with global consumer banking slipping backwards.

Citi has just announced plans to sell its consumer banking franchises in Indonesia, Malaysia, Thailand and Vietnam to Singaporean bank UOB for $690 million more than the value of net assets, which seems a sensible move all round.

Citi shares stand at $65, having fluctuated between $40 and $80 over the past five years. The yield is the best among major US banks at 3.05%.

Source: interactive investor. Past performance is no guide to future performance

Goldman Sachs (NYSE:GS), like JPMorgan, rounded off what had been a great year with a disappointing quarter. While revenue in the final months rose 9.3% year-on-year, pre-tax profits slumped 9.3%. A 23% rise in operating profits was to blame.

In contrast, revenue for the full year was up by a third and pre-tax profits more than doubled.

Goldman shares hit the bottom at $140 in May 2020 but topped $400 last summer. They currently stand at $353, where the yield is 1.71%.  

Source: interactive investor. Past performance is no guide to future performance

Hobson’s choice: Bank shares have been slipping since the latest results so any investor interested in US banks might do well to hold off until they settle. Existing shareholders might as well hold on for better times that should come in mid year.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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