The US Federal Reserve have signalled that they will be pursuing a tighter monetary policy, which translates to an increase in interest rates. Retail investors looking to understand the banking sector should take note of this: this usually translates to good news for banking stocks.
Rising rates tend to point to a strengthening economy. This means that borrowers have an easier time making loan payments, which in turn means that banks have fewer non-performing assets. Banks can also earn more from the spread between what they pay (to holders of savings accounts and deposit certificates) and what they can earn (from debt instruments such as U.S. Treasury Bonds).
However, there can be caveats to this since rates aren’t the only determinants to banks’ fortunes. In this follow-up article to our our prior coverage on banking ETPs, we’ll examine the scenario as it stands for the banks underlying some of our ETPs – HSBC (ticker: HSBC), Barclays (ticker: BCS), J.P. Morgan (ticker: JPM), Citi (ticker: C) and Goldman Sachs (ticker: GS).
Financial Sector: Pain Ahead
2021 started with a bang when it came to financial stocks. Large stimulus packages and vaccine availability were considered important reasons for this optimism. In addition, the Federal Reserve signalled two rate hikes in 2023. Since increasing interest rates typically help improve profit margins of banks, this should have been additional factor for upticks in this sector.
Despite all of this, by the end of Q2 2021, the S&P Financial Sector Index (IXM) had a large tumble immediately after a record 11% increase since the start of the year. Historically, there has been a strong correlation between IXM and its parent index the S&P 500 (SPX). This relationship came unglued in 2021.
The reason for this is the fact that banks don’t just derive revenues from interest rates. They also generate a significant amount of their revenue from non-interest bearing activities: brokerage services, banking-related service charges, credit card-related fees, mortgage-related activities, etc. These activities are heavily dependent on economic factors that the market doesn’t consider being very optimistic at the moment.
As of 17th of June, IXM’s performance has dipped below that of the SPX.
Readers of the previous article will recall that HSBC was in strategic retreat from Europe while consolidating in Asia. After 18 months of negotiations, HSBC has finalised the sale of its French retail bank to U.S.-based Cerberus Capital Management. Meanwhile, the bank’s Asia-based wealth management business – which is currently under aggressive expansion with 5,000 new wealth planners expected to be hired – is currently worth around $5 billion and is prospectively valued anywhere between $72 billion to $96 billion.
Barclays’ financials has one particularly interesting metric: Barclays PLC’s current insider ownership accounts for 12% of all stocks. Coming at the heels of a stalwart year, the bank’s principal managers are betting very strongly on themselves and their efforts to make this another successful year.
Many investors use the reported Earnings Per Share (EPS) as a proxy for understanding prospective share performance. Doing a side-by-side comparison of the two European banks’ change in EPS vis-à-vis the prior year over the past three years, we see the following picture:
Just going by the EPS growth numbers, it would appear that HSBC has been a little more stable than Barclays. However, it bears noting that big banks have a hybrid business model: no single factor is an absolute indicator of success.
J.P. Morgan has been on a lending spree this past year: the bank is the 2nd-largest lender to SoftBank as the Japanese technology conglomerate ramps up its investment plans. The bank has also agreed to purchase UK digital wealth manager Nutmeg in its bid to revamp its wealth management offering in the U.K.
While Citigroup is expected to deliver around $17.79 billion in sales in this current quarter – well in line with analysts’ estimates who are posting a “Buy” recommendation – Citi CEO Mark Mason warns that Q2 will have increased expenses as well as a fall in trading revenue. The former is related to a number of orders received from regulators late last year with regard to its deficiencies in enterprise-wide risk management, compliance risk management, data governance, and internal controls. The latter is primarily tied to its dwindling performance in its fixed-income unit.
Analysts consider Goldman Sachs to be “overweight” (which is a signal for investors to buy more shares of the company) with an average target price of $394.18 per share. However, there has been significant insider selling over the past 3 months and it is estimated that the bank’s debt is not well covered by operating cash flow.
Doing a side-by-side EPS change comparison of the three U.S. rivals over the past three years yields the following picture:
Of the three, the EPS change analysis indicates that – despite the insider selling indicator – Goldman Sachs has had the most robust upside in EPS growth and the most muted downside in EPS declines. This is one reason (out of many other indicators) why analysts seem to be recommending the bank so ardently.
The most objective indicator of a bank’s performance would be the market-determined share price performance on a daily basis since it incorporates all market participants’ views. Readers will recall in our previous article with YTD data until the end of March, being invested into the dollar-denominated ETPs for Goldman Sachs (GS2) and Barclays (BCS3) proved to be the benchmark-beating alternatives to investing in stocks that also beat the benchmark.
But with new data since then, only Goldman Sachs has shown outperformance, albeit with high volatility, while HSBC has caught up with the benchmark in Q2 2021. All other banks have been underperforming since Q2 2021 began.
However, it bears noting that the somewhat grim prognostications being made about the banking sector – borne out by the bearish performance of the IXM – means that going short on the banks in the event of IXM’s continued downturn might be called for.
Violeta a rejoint Leverage Shares en septembre 2022. Elle est chargée de mener des analyses techniques et des recherches sur les actions et macroéconomiques, fournissant des informations importantes pour aider à façonner les stratégies d’investissement des clients.
Avant de rejoindre LS, Violeta a travaillé dans plusieurs sociétés d’investissement de premier plan en Australie, telles que Tollhurst et Morgans Financial, où elle a passé les 12 dernières années de sa carrière.
Violeta est une technicienne de marché certifiée de l’Australian Technical Analysts Association et est titulaire d’un diplôme d’études supérieures en finance appliquée et investissement de Kaplan Professional (FINSIA), Australie, où elle a été conférencière pendant plusieurs années.
Julian a étudié l’économie, la psychologie, la sociologie, la politique européenne et la linguistique. Il possède de l’expérience en matière de développement commercial et de marketing grâce à des entreprises qu’il a lui-même créées.
Pour Julian, Leverage Shares est une entreprise innovante dans le domaine de la finance et de la fintech, et il se réjouit toujours de partager les prochaines grandes avancées avec les investisseurs du Royaume-Uni et d’Europe.
Oktay a rejoint Leverage Shares fin 2019. Il est responsable de la croissance de l’activité à travers des relations clés et le développement de l’activité commerciale sur les marchés anglophones.
Il a rejoint LS après UniCredit, où il était responsable des relations avec les entreprises pour les multinationales. Il a également travaillé au sein de sociétés telles qu’IBM Bulgarie et DeGiro / FundShare dans le domaine de la finance d’entreprise et de l’administration de fonds.
Oktay est titulaire d’une licence en finance et comptabilité et d’un certificat d’études supérieures en entrepreneuriat du Babson College. Il est également détenteur de la certification CFA.
Sandeep a une longue expérience des marchés financiers. Il a débuté sa carrière en tant qu’ingénieur financier au sein d’un hedge fund basé à Chicago. Pendant huit ans, il a travaillé dans différents domaines et organisations, de la division Prime Services de Barclays Capital à l’équipe de recherche sur les indices du Nasdaq (plus récemment).
Sandeep est titulaire d’un master spécialisé en finance et d’un master en administration des affaires de I’Institut de technologie de Chicago.