US banks prosper in 2018

The quality of US bank earnings belies the weak performance of the sector’s stock prices. Now investors wait for a price signal to confirm the strong fundamentals.

US trader Source: Bloomberg

The year 2018 was a bumper year for the US bank sector, which might strike investors as odd given the rout in the sector’s stock prices. Overall, the big US banks reported profits of more than $120 billion, as the sector reaped the benefits of the strong US economy and tax cuts imposed by US President Donald Trump.

One highlight was the spread between loan earnings and deposit costs. This was better than expected, with deposit costs rising at a slower rate than feared. In this environment of rising interest, the banks appear to be doing well.

Despite being cited as a reason for stronger earnings, trading revenue was weaker than expected. Investors appeared to prefer staying on the sidelines, or sitting on their hands, to repeatedly moving funds in and out of positions. Bond trading revenue was particularly weak, down by almost 20% at Goldman Sachs for example. However, banks said that January trading activity had been better.

In the accompanying conference calls, bank leaders were keen to stress that economic growth was better than that indicated by official updates, and that the recent volatility overstated the bearish case. In addition, credit markets are not flashing warning signs in the way that was seen in 2008.

There are of course clouds on the horizon. A potential intensification of the US-China trade war would work against further economic growth, while the ongoing government shutdown has started to make its presence felt in lending to consumers and businesses, and also hurting the pipeline of initial public offerings (IPOs) due to the closure of the US Securities and Exchange Commission (SEC).

Notably, the final quarter (Q4) of 2018 has seen an increase in insider buys of bank stocks, echoing the moves made by Jamie Dimon in 2016 when that banker stepped in to buy up JPMorgan shares as the market bottomed out following the growth scare of 2015/16. While this is not a foolproof guide, it makes more sense to look at buying bank stock when senior executives are buying too, rather than buying when bank bosses are selling.

Bank stocks have soared since the December low, as seen by the Financial Select Sector SPDR Fund (ETF XLF). However, the price has yet to break downtrend resistance from the September highs. This would require a close above 250, clearing both horizontal and trendline resistance. This would be a good step to creating a higher high, however, it still requires a close above the November/December high around 2750.

Financial Select Sector SPDR Fund chart

Financial Select Sector SPDR Fund chart

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