Large-cap banks will begin the first results campaign in 2019 next week. Their biggest challenge will be to dispel fears of an impending recession.
Bank stocks experienced a difficult period in 2018, mainly because investors fear being exposed to finance if a recession crippled the industry with loan losses. As the post-crisis recovery is in its tenth year, alarm signals – such as the easing of the Fed's monetary policy and a slight deterioration in credit quality – are beginning to emerge.
Shares of Morgan Stanley (MS), Wells Fargo (WFC), Citigroup (C), Goldman Sachs (GS) and State Street (STT) all fell by more than 20% over the past year. Although JPMorgan Chase (JPM), Bank of America (BAC) and Bank of New York Mellon (BK) performed better in comparison, they still underperformed the S & P 500 and Dow Jones Industrial Average indices.
The shares of the eight largest banks have had a difficult time in the past year.
The concern over a future recession was not eased by a surprise US Treasury statement in the United States before Christmas, in which Treasury Secretary Steven Mnuchin gave the go-ahead to the liquidity level of the US. larger and more systematic financial institutions. The markets were liquidated, the public wondering if a liquidity problem existed or not.
Kevin Fromer, chairman and chief executive of the Financial Services Forum, told Yahoo Finance that the liquidity of the eight largest banks – which includes FSF members – has doubled in the last 10 years and has improved significantly over pre-crisis levels.
"I think they are well prepared to serve their customers," said Fromer. "And I think they do it every day."
FILE PHOTO: A woman walks past the Citibank logo posted outside the Citibank Plaza in Hong Kong on July 28, 2014. REUTERS / Bobby Yip / File Photo
The risk of recession will be the main theme of this quarterly earnings series, which will start as soon as Citigroup reports on Monday morning.
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Morgan Stanley wrote on Tuesday that the history of financial services in 2019 will begin with guidance provided by major banks in their calls for results next week. Their rating indicated that consumer credit seemed healthy as Americans continued to trust spending. Morgan Stanley warned, however, against the corporate sector, saying that while the growth of commercial and industrial lending had been strong, the volume of mergers and acquisitions had declined sharply by the end of 2018. If the merger activity remained moderate, banks with large investment bank units could suffer (ie Morgan Stanley, JPMorgan Chase and Goldman Sachs).
Business loans are also at the center of concerns as concerns continue to grow in the face of banks' exposure to leveraged loans. The worsening of the corporate debt situation raises the question of whether banks could bear the consequences if borrowers began to default on loans raised six or seven times their profits. Although the banks' exposure has always been low because banks generally sell loans to investors, the enthusiasm aroused in the leveraged loan market has cooled considerably over the past two years. last months. Citi issued a note on Wednesday citing the risk that banks will keep leveraged loans that they can not sell, which could be seen in next week's results.
"A risk is the potential negative impact of leveraged loan agreements that have not clarified the market in the fourth quarter, the debt may remain in the books of banks, which could weigh on the results of the 4th quarter, "writes Citi.
Citi added that the unease in banking stocks was largely due to the macroeconomic reading of financial indicators such as the flattening of the yield curve.
The story continues
Dick Bove of Rafferty Capital Markets told Yahoo Finance that 2018 was a good year for paper banks; the sector experienced modest loan growth, higher margins, lower costs and no increase in loan losses.
"They have done extremely badly and the underlying fundamentals of the companies are not so bad," Bove said about the dissonance between the price of their shares and the overall performance in 2018.
RBC Capital Markets expects banks to post strong new earnings for the quarter, with 2.4% year-over-year growth, an increase in net interest margin of two basis points (measure interest earned on loans minus interest paid on deposits), lower operating expenses and strong credit quality.
Credit Suisse writes that the time has come for individual companies to prove that they can protect themselves against a possible economic downturn through tighter operational indicators and a competitive attitude.
"All banks are not equal," wrote Susan Roth Katzke of Credit Suisse on Monday. "Some will come out better than others. Those who emerge the best will be profitable market share holders. These are the banks we want to own. "
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