A leap in Treasury yields has markets behaving as if the worst is over for banks. But lenders still face a number of bad choices at the moment. The KBW Nasdaq Bank index had its best two-day run of the year Monday and Tuesday, surging 5.4%, coinciding with a sharp two-day rise of 0.18 percentage point in 10-year U.S. Treasury yields.
While this euphoria reigned, however, bankers presenting at the Barclays financials conference on Monday and Tuesday offered plenty that should cure any temptation to leap back into the stocks. True, a stabilization in rates would relieve pressure on banks’ net interest income.
& Co. said that continued downward pressure on rates would widen its forecast decline in lending income to 6% this year instead of 5%.
both lowered their expectations as well. But even a potential floor for rates won’t solve banks’ other growth dilemmas. With corporations waiting for clearer signals on trade and a possible recession, nonconsumer loan growth has stalled. As Wells Fargo Chief Financial Officer
put it, “There isn’t extraordinary demand for borrowing these days.”
Even when presented with opportunities, some banks are saying there is reason to go slow. JPMorgan Chief Executive
said his bank was choosing to be “cautious” in commercial real-estate and business lending. Globally, he said, “it’s possible that you just kind of have a slower economy.” Capital markets activity won’t provide much relief, either. Desks may benefit from a surge of bond issuance by clients tapping low rates. However, that debt is coming at the expense of loans and revolving credit facilities. “And what do people do with that money now? They’re basically buying down bank debt,” said
Bank of America
Chief Operating Officer
Growth in mortgage originations is strong. But if banks push hard on that, they risk locking themselves into holding loans at what are still historically low yields. Prepayment risk, meanwhile, threatens potential accounting losses on mortgage-backed securities. It would be a mistake to misread the market’s momentum. This week’s rise still leaves big bank stocks off by more than 9% over the past year. Citigroup, Bank of America and Wells Fargo on average trade at 9.6 times forward earnings, which is below their five-year average of 10.9. But given the risks they face on rates, credit quality and loan growth, that looks like an appropriate discount under the circumstances. Meanwhile, JPMorgan isn’t discounted at all, trading at 11.3 times, right at its five-year average. Investors are lacking good options at the moment. Write to Telis Demos at firstname.lastname@example.org
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