US bank stocks were up +7.2% last week. 8 out of the top 10 performing US stocks last week were bank stocks. Does it mean US bank stocks are in the clear? 2️ insights:
1️) The rebound in smaller US regional banks played a big part in this week's performance.
Until this past week US regional banks stocks were down 25% since early March when Silicon Valley Bank (SVB) went under and caused major turmoil in the US banking industry plus a blow to the confidence of US banks (particularly smaller regional banks). Looking at the recent earnings results are US regional banks in the clear? Maybe.
We can say 2 things improved which may suggest stabilization amongst smaller regional banks:
Customer deposits outflow Q2 vs Q1 2023 seems to be stabilizing such as:
- Zions: +7%
- Charles Schwab: -7%
- Key Bank: +1%
- Citizens Financial: +2%
Net interest income also seem to be decreasing less in Q2. "Net interest income" (NII) is the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors. So from a perspective that US regional banks have been beat down 'too much', given they are stabilizing seems to be why investors may deem them to be 'undervalued'. But issues still remain which include:
- Can this stabilization trend continue?
- Net interest income is still an issue: US regional banks need to pay MORE to keep deposits at the bank given there are high yielding alternatives (like Money Market Funds yielding north of 5%) available to customers.
- Most concerning is their large exposure to US commercial real estate loans which are deteriorating.
2) The banking giants also gained this past week up +6%
Although there were some 'misses' the majority of the US banking giants reported positive progress in Q2 such as:
- Profits in consumer banking have surged due to increased credit card borrowing and higher loan charges.
- Deposit outflow, although still an issue, seems to be slowing down.
But US banking giants relying on more on their corporate/investment banking or trading business suffered in Q2. Examples include Citi's profits were -36% in Q2 (versus Q2 2022) on the back of decreased business and fees from both their trading business and their investing banking division. When looking deeper into the data this issue was felt at Goldman Sachs, Morgan Stanley, JP Morgan and other banking giants to varying degrees. What we can say is US banking stocks have lagged most sectors this year amongst US stocks:
- US tech stocks (Nasdaq): +34%
- US broad market stocks (S&P 500): +18%
- US banking/financial stocks: +9%
So maybe there is some 'value' to be had for US bank stocks.
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