Chicago, IL – May 4, 2022 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Bank of America Corp. BAC, The Goldman Sachs Group Inc. GS, JPMorgan Chase & Co. JPM, Morgan Stanley MS and Citigroup Inc. C.
Here are highlights from Tuesday’s Analyst Blog:
Major Banks Gain on Soaring Yields: Will This Trend Continue?
The Federal Reserve will conduct a crucial FOMC meeting from May 3-4. Market participants across the world are eagerly waiting for the outcome of this meeting. Economists and financial experts are by and large expecting the central bank to raise the benchmark interest rate by 50 basis points after raising the Fed fund rate by 25 basis points in March.
As the market is expecting the beginning of a higher interest rate regime, on May 2, the yield on the benchmark 10-Year U.S. Treasury Note rose about 11 basis points to 2.994%. At session's high, the yield hit 3.01%. The yield crossed the key psychological barrier of 3% for the first time since December 2018. The yield on the 30-Year U.S. Treasury Note rose about 9 basis points to 3.044%.
Consequently, shares of major regional and investment banks like Bank of America Corp., The Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. rallied 1.3%, 1.6%, 0.9%, 1.7% and 1%, respectively, on May 2. All five stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Fed's FOMC Meeting in Focus
Investors will closely monitor the post-FOMC statement of Fed Chairman Jerome Powell and his answer in the press conference to gauge whether the aggressive rate hike policy will be a single dose or if it will just open the gate for more aggressive rate hikes in 2022. At the same time, market participants would like to hear the Fed's decision regarding shrinking the size of its $9 trillion balance sheet.
Several measures of U.S. inflation are currently at their 40-year highs. Fed has decided to take harsher measures to combat soaring inflation. However, a large section of economists and market experts have warned that too much tougher stand may result in economic contraction that will lead to a recession in the U.S. economy in the near future. Notably, the U.S. economy has contracted by 1.4% year over year in first-quarter 2022.
Banks Likely to Benefit
A hike in interest rate will raise the cost of funds, which would enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting profits margins.
Banks have been witnessing a contraction in net interest margins (an important barometer to gauge banks' financial performance) owing to near-zero rates. This is also hurting their top-line growth.
Consequently, as the Fed starts raising interest rates, pressure on margins will gradually alleviate and support banks' net interest income. Despite the diversification of revenue streams, banks earn a major portion of their revenues from interest income.
The U.S. economy is now fully operational and the struggling labor market has almost reached at the pre-pandemic level. Several major investment bankers and money managers have already started removing pandemic-related adjustments from their financial models. As a result, as the economy operates in full swing, banks will generate more business.
Banks Provide Solid Outlook
Most of the major regional and investment banks have given strong guidance for the rest of 2022 in their last reported earnings conference calls. JP Morgan expects managed NII (excluding CIB Markets NII) to be $53 billion, up $8.5 billion from the 2021 level. The rise is largely expected to get support from expectations of six interest rate hikes this year and balance sheet growth, partly offset by "the roll-off of PPP."
Goldman Sachs increased medium-term firmwide ROE target to 14-16% from the previous 13% and return on tangible common equity to 15-17% from more than 14% stated earlier. In the Asset Management segment, organic traditional long-term net inflows are projected to reach $350 million by 2024, up $100 billion from the previous target. Also, $225 billion worth of gross alternative fundraising is anticipated by 2024 from the prior target of $150 billion.
Given the forward curve expectation for higher interest rates and expectations of further loan growth, Bank of America expects significant NII improvement in the next several quarters. Provided that loans grow as expected and rates in the forward curve materialize, Bank of America expects NII in the second quarter of 2022 to increase by more than $650 million over the prior-quarter level and then increase significantly on a sequential basis in each of the following two quarters of 2022.
Bottom Line
In addition to the rate hike, the Fed may also give a guideline about the timing and process of shrinking its $9 trillion balance sheet in the May FOMC meeting. The shrinkage of Fed's balance sheet will eventually become another round of rate hike. Therefore, it will be better to stay with major regional and investment banks mentioned above. These companies are also regular dividend payers, which may act as an income stream during market's downturn.
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