2018 could be a banner year for bank stocks (see fine print)

Get ready: between lower regulation, higher interest rates, and more share buybacks, 2018 could be kind to long-suffering bank investors, analysts say.

“We believe large-cap bank stocks have the ability to continue to increase, as well as outperform the market, over the next 12 months,” wrote Jason Goldberg, a Barclay’s analyst, in his 2018 preview.

Goldberg’s big bank universe includes Bank of America BAC, +0.70% CitigroupC, -0.58% JPMorgan Chase JPM, -0.36%  , and Wells Fargo WFC, +1.25%  .

Chris Whalen, a bank analyst and financial services consultant, agrees. “Bank earnings in 2018 are likely to continue to rise with asset returns, and expenses are likely to fall as regulatory changes ripple through the world of banks and non-banks alike,” he wrote.

But there are some caveats, not least that expected “reflation” and the animal spirits of lending and spending have continually failed to materialize, year after year.

Net interest margins could expand:

To be profitable, banks need a bigger spread between short-term interest rates — what they pay for deposits — and long-term rates, which they receive for lending.

Interest rates — and the spread between them — have been depressed in the wake of the financial crisis, as is to be expected in a sluggish economy. When the “yield curve” steepened after the surprise presidential election, it was because investors expected faster growth.

Barclay’s Goldberg believes the margins banks get from that spread will grow by eight basis points next year, slower than 2017 but better than 2016. And most analysts think more Federal Reserve rate hikes, plus the fiscal stimulus from the congressional tax plan, will steepen the curve even more, benefiting banks.

But as has been the case for years, the yield curve isn’t behaving, and some analysts, including JPMorgan’s team, think it may get worse before it gets better, and that the Fed’s plans for steady rate rises may again be stymied.

“If as we suspect the yield curve inverts next year, the FOMC may need to rethink its schedule for benchmark rate increases,” Whalen wrote.

As David Hendler, founder of Viola Risk Advisors, puts it, “The way banks deal with it is volume.”

Growth in lending:

Goldberg expects only “modest” loan growth, although Hendler thinks mortgage lending volumes may surprise to the upside.

The banks themselves say tax cuts will juice demand. At an early-December conference, Bank of America CEO Brian Moynihan said the bank has been ramping up hiring of loan officers and expects solid demand.

“You’ve heard some people now say they’ll increase their capital expenditures and that will accelerate,” Moynihan said. “So I think that’s what our corporate clients are telling us. They have been waiting for some certainty here to figure out what to do to plan across three- to five-year periods, which they as entrepreneurs and CEOs have to do. So I think it will unleash some activity, no question.”

Still, it’s worth noting that CEOs themselves have told the Trump administration exactly the opposite.

Less overhead:

If there’s one thing that’s certain, it’s that banks will be regulated less. That means not only a freer hand in how they run their businesses—but also less time, money, and energy devoted to compliance exercises.

Source: Market Watch

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