Investors Warm Up To Big Bank Shares, Paring Sector Losses -- WSJ
27 July 2016 - 5:02PM
Dow Jones News
By Aaron Kuriloff
Plenty of investors have shunned U.S. bank stocks this year, but
some are seeing new hope for the sector.
Large U.S. banks have outpaced the S&P 500 since J.P. Morgan
Chase & Co. became the first of the biggest U.S. lenders to
beat reduced earnings expectations earlier this month.
The KBW Nasdaq Bank Index of large U.S. commercial lenders has
risen 2.5% since July 13, compared with the broad stock-market
index's 0.8% gain. Financial shares in the S&P 500 have also
outgained the market, rising 1.3% in that time.
While few expect the Federal Reserve to raise interest rates at
its meeting this week, investors have new hope that they may one
day climb, which could provide an extra boost to banks. Though bets
on a rate rise in the near-term all but vanished as markets fell in
the wake of the U.K.'s vote last month to leave the European Union,
new data suggesting continuing U.S. economic growth has many
investors now expecting an increase by the end of the year.
Rising interest rates tend to help banks because they increase
the gap between what they charge on loans and pay on deposits, a
spread known as the net interest margin.
"If you really want to be a contrarian investor, and are looking
for something cheap that got totally left behind and has decent
yield, you should look at high-quality banks," said Susan Bao,
portfolio manager at J.P. Morgan Asset Management, adding that the
firm's $10 billion U.S. Large Cap Core Plus Fund is overweight
banks.
Bank stocks' performance is a reversal for the sector, which
tumbled at the start of the year as investors worried about the
impact of slowing global growth, and again after the U.K. vote
convinced many investors that interest rates would stay lower for
longer, pressuring profits from banks' lending businesses.
The KBW bank index remains down 7.3% so far this year, and
financial stocks are the only S&P 500 sector still in the
red.
But after major U.S. stock indexes reached records in a rally
led by shares of utilities and staples, which tend to be more
stable than the broader market and pay relatively high dividends,
some investors have begun to embrace stocks that are more sensitive
to economic growth, including financial and bank stocks.
Some investors and analysts noted that many U.S. banks are
trading at discounts to book value, or a firm's net worth, despite
improving balance sheets, and offer potential dividend growth to
the yield-starved.
Dividends have played a role in stock-market gains this year,
with the average dividend yield of the S&P 500 higher than the
yield on the benchmark 10-year Treasury note, currently at
1.561%.
"Banks took it on the chin, but they could show signs of life,"
said Matt Peron, head of global equity at Northern Trust. "They're
certainly cheap."
Write to Aaron Kuriloff at aaron.kuriloff@wsj.com
(END) Dow Jones Newswires
July 27, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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