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Megabanks and regional lenders will benefit from rising interest rates and potential loan growth in 2022, but could be challenged to extend their large stock market gains from 2021.
The banking industry faces a tougher regulatory and perhaps economic environment in the new year, but lenders are likely to see their margins increase as central banks raise interest rates to fight inflation.
Wall Street’s view has been bullish, with stocks of major financial institutions and regional banks posting strong performances in 2021. As of December 22, Dow components Goldman Sachs GS,
and JPMorgan JPM,
grew by approximately 45% and 23% respectively in 2021. Wells Fargo WFC,
won 59%, Morgan Stanley MS,
increased by about 44%. Citigroup C,
fared less well, with a 3% drop.
The Dow Jones Industrial Average DJIA,
is up around 16.7% for the year while the S&P 500 SPX,
increased by 24.7%.
With regional banks boosted by record mergers and acquisitions in the industry, the KBW Bank Index BKX is up about 33%.
While it may be difficult to sustain these types of gains in 2022, analysts have found at least a few things to cheer about.
““Big bank stocks have sold and have fallen significantly behind the S&P 500 since the Omicron news was published. Valuations are attractive and should rise as the Fed tightens. ‘“
JPMorgan analyst Vivek Juneja said bank stocks looked healthy for the remainder of 2022, but would likely start the year choppy due to omicron variant issues. The company would then outperform as the Fed focuses on fighting inflation, but the main challenge is whether these stocks will succeed in taming prices without casting cold water on economic expansion.
“Big bank stocks have sold and have fallen significantly behind the S&P 500 since omicron’s release,†Juneja said in her Dec. 16 research note. “Valuations are attractive and should rise as the Fed begins to tighten.”
Consumer spending and travel may be held back in the short term by variant issues, but is expected to pick up as COVID-19 trends begin to improve, he added. Other complicating factors include potential credit losses, higher spending on technology and compliance costs, and a “tougher” regulatory environment, he said.
Bank of America BAC,
is seen as a larger beneficiary of higher rates, JPMorgan said. US Bancorp USB,
is set to benefit from a pickup in airline and travel spending later in 2022, while PNC PNC,
will reap short-term benefits from the merger cost savings, as it invests its “large excess cash”.
See also: Improving Credit Outlook, Mergers and Acquisitions, Rising Interest Rates, and Lending Growth Spur Modernization of U.S. Regional Banks
Another potential benefit for banks is credit activity. According to data from the US Federal Reserve, commercial and industrial (C&I) loans were up 1.9% in the fourth quarter from the start at major banks, an improvement from the third quarter.
“If this faster growth in lending continues into 2022, it would be good for banks,†Juneja said. “However, competition from non-banks is expected to remain very intense with rates still relatively low.”
On the regulatory front, President Joe Biden has yet to nominate a candidate for the office of the Comptroller of the Currency after Saule Amarova withdrew his name earlier this month. Another important vacancy is the replacement of Randal Quarles, the Fed’s senior vice president for banking supervision.
Allen Denson, a partner at Strook & Strook & Lavan LLP, said uncertainty on the federal regulatory front could stifle innovation at banks.
“A bank is less likely to introduce a new product if the regulatory environment is unknown,†he said. “Banks prefer stability.
Meanwhile, banks must move towards a change in consumer behavior by investing in technology to provide more online banking services. Banks may also face issues with their loan portfolios if they are exposed to commercial properties affected by a drop in office occupancy rates or a decline in retail activity.
Overall, the Biden administration has indicated it wants to slow bank consolidation and support community banks, in an effort to protect consumers, Denson said.
Climate change issues are also high on the banks’ radar in 2022.
The Office of the Comptroller of the Currency last week released proposed principles that would increase banks’ disclosure of fossil fuel climate risks in lending.
Also read: OCC pressures big banks to expose climate change risks
However, the outlook is different for regional banks and medium-sized banks. Hovde Group analyst Brett Rabatin said the firm had held nearly 20 meetings in recent weeks with institutional investors in the banking sector and most remained bullish on the sector.
Hovde’s regional banking choices include Colony Bankcorp CBAN,
First Bank (NJ) FRBA,
First Bancorp INBK Internet,
MVB Financial Corp. MVBF,
and Sterling Bancorp SBT,
Mid-cap choices include First Merchants Corp. FRME,
Old National Bancorp ONB,
and Veritex Holdings VBTX,
“From our conversations, almost every investor we’ve met believes the space is poised to outperform the broader market again in 2022,†Rabatin said in his Dec. 17 research note. “Probably the most debated topic of conversation was the outlook for loan growth and whether banks will be able to meet their growth targets next year.”
Some investors believe excess liquidity will be drawn before significant growth in commercial loans emerges, while others were more positive and expect strong growth trends in 2022, he said.
See the evaluation game: UBS names Bank of America as first choice in glowing outlook for banking stocks
