Bank stocks set to experience best year since global financial crisis

Global bank stocks are on track to post their best year since the wake of the financial crisis, benefiting from expectations of higher borrowing costs as rate regulators tackle widespread inflation.

An MSCI benchmark that tracks stocks of global banks – measured in US dollars – has jumped about 30% so far in 2021, outperforming the roughly 20% increase in the all-sector gauge of the index provider.

Banks haven’t made such gains since 2009, when the same MSCI stock index rose by more than a third as lenders recovered from the depths of one of the worst crises to hit the financial sector.

US banks in particular have been supported by healthy volumes in their trading activities in recent months, along with advising on “extraordinary” transactions and the release of reserves set aside to cover bad debts, Scott said. Ruesterholz, fund manager at Insight Investment. “It’s a phenomenal environment in which to operate. ”

A KBW index focused on US banks has climbed more than two-fifths this year, positioning it for its best annual performance on record. This improvement stands in stark contrast to 2020, when the same index fell about 14% as the pandemic prompted central banks to cut interest rates to record highs, compressing the interest rate difference that banks hold. charge their customers for loans and those they pay on customer deposits.

The performance of banks around the world has diverged over a longer period, with the United States far surpassing Europe. Over five years, an MSCI index focused on US banks has climbed more than 60 percent, while its European counterpart (valued in dollars) is down 2 percent.

Banks tend to follow movements in 10-year U.S. Treasuries, said Beata Manthey, equity strategist at Citigroup, who expects benchmark government bond yields to hit 2% at the start of the year. the year, up from their current level of about 1.6 percent. Bond yields move in the opposite direction to prices.

Mark Haefele, chief investment officer at UBS, noted that with energy stocks, “financials are doing well from a recovery, but if there is excessive inflationary pressure, they may as well be doing well.”

The US Consumer Price Index, a key indicator of inflation, showed an increase of 6.2% in October compared to the same period a year earlier, marking its largest increase since 1990. The British inflation hit 4.1% the same month, according to data released last week.

In turn, traders are now betting that the Bank of England will increase borrowing costs to 0.25% in December, from their current level of 0.1%, after the BoE’s surprise decision to keep rates stable. this month.

Subsequently, the markets take into account “perhaps [0.75 per cent] at 1% interest rate ”in the UK by the end of next year, said Alex Wright, fund manager at Fidelity. Such a scenario would increase UK retail bank NatWest’s profits by 24%, he said, while adding 12% to Lloyds’ profits and 8% to Barclays.

An increase of 1 percentage point [at the ECB and the Fed] Likewise, US bank profits would increase by 17% and European profits by a quarter, according to Stuart Graham, analyst at Autonomous Research.

These potential increases reinforced the optimism of analysts. Half of investors polled by Bank of America this month said they were overweight European banks, the highest proportion on record, based on data dating back to 2003.

Bill Nygren, chief investment officer for US equities at Harris Associates, is optimistic that bank stocks will continue to climb, albeit from a weak base. “We went down a long, steep descent and now we’ve had this little rally over a bunny hill,” he said. “But we think ‘normal’ might be a bit higher than it is today.”

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