As has been widely documented, banks stocks and the related exchange traded funds are ultra hot this year. For example, the Invesco KBW Bank ETF (NASDAQ: KBWB) is higher by 43.25% year-to-date, and it’s showing no signs of losing momentum.
KBWB, which follows the widely observed the KBW Nasdaq Bank Index, is up almost 4% over the past month and residing around 52-week highs. That bullishness is notable, as is the fact that bank earnings have multiple tailwinds for 2022 and beyond.
“First, it is expected that the Federal Reserve will begin lifting interest rates, which will widen the spread banks earn between the interest they charge on loans and the interest they pay on in deposits,” reports Carleton English for Barron’s. “Analysts at Oppenheimer note that the Treasury yield curve is forecasting at least one or two rate hikes by 2023, adding that the first hikes are the most ‘consequential’ for banks.”
In meaningful news for KBWB investors, if the Fed increases borrowing costs twice, that pair of hikes would boosts banks’ net interest margins by 5%, according to Oppenheimer. Net interest margins measure the difference between what banks pay out in interest to depositors and the interest earned on assets, such as loans, credit cards, and more.
Speaking of loans, loan growth has been tepid in the wake of the coronavirus pandemic. In fact, banks were forced to set aside cash last year to cover bad loans — a scenario that didn’t end up to be as dire as the Fed anticipated. Now, banks are looking for avenues to bolster loan growth, and that could support earnings growth in 2023.
“We think 6% loan growth in 2023E is readily possible, but that zero percent is highly unlikely. We think that there could easily be 100-200 basis points of rate increases by 2023E, but that none is highly unlikely,” Oppenheimer analyst Chris Kotowski says in a note cited by Barron’s.
Adding to the case for KBWB is a familiar catalyst: There’s value in bank stocks. While that’s an often-cited catalyst, banks do remain credible value plays.
“Banks currently trade at 13.8 times projected 2022 earnings and at 1.8 times tangible book value, Jennifer Demba, analyst at Truist wrote in a note Monday. The 20-year high median valuation for the sector is 17.8 times forward earnings, and 3.5 times tangible book value, she added, implying plenty of room for upside,” according to Barron’s.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.