Buy The Dip In U.S. Bank Stocks

The dip in U.S. bank stocks caused by narrowing net interest margins is a buying opportunity.

Buy The Dip in US Bank Stocks

R egional bank stocks sold off following third quarter profit results. Lower mortgage rates and the pick-up in prepayments have pressured net interest margins, while litigation costs and debt valuation adjustments also weighed on profits. But according to our U.S. Equity Strategy service, the earnings outlook remains encouraging, despite the compression in net interest margins.

Even a gradual recovery in housing has allowed overall bank lending to broaden beyond C&I loans, as residential mortgage origination is accelerating, albeit from a low level. Banks are able to originate long-term fixed mortgages and then offload them in the secondary market at better rates, locking in a tidy profit. This spread is near its highest level since the mid-1980s.

Bank lending is clearly highly correlated with bank earnings growth.

The implication is that evidence of increased lending volumes should be viewed as a critical positive earnings driver, despite the squeeze on net interest margins. Also, overall employment is climbing much faster than bank employment. This is favorable for relative profits and, by extension, relative share price outperformance.

Importantly, bank loans are climbing much faster than bank headcount, reflecting productivity improvement. With relative valuations still close to rock bottom levels,investors remain unconvinced about the durability of the recovery in bank profitability.

Bottom line: We recommend leaning into this pessimism by adding to overweight positions on the dip in the S&P regional bank index.

Print Friendly
Macroeconomic Research
BCA Research About BCA Research

BCA Research is the world’s leading provider of independent investment research. Since 1949, the firm has supported its clients in making better investment decisions through the delivery of leading-edge economic analysis and comprehensive investment strategy research. With access to over 150,000 raw time-series, BCA strategists are aided by one of the most extensive research databases in existence, cover every region of the globe, and provide analysis on virtually every investable asset class. BCA maintains a head office in Montreal, with local offices in New York, Los Angeles, London, Hong Kong, Sydney, and Buenos Aires. Not yet a client of BCA? Take a short trial to our research.

Speak Your Mind

*