The specter of higher interest rates fueled an early 2022 surge in bank stocks, but
The KBW Bank Index climbed nearly 10% in the first two weeks of the year. However, even though futures markets still expect Federal Reserve policymakers to pursue multiple rate increases in 2022, beginning next month, the index has tapered off and was up just 1% on the year through last week.
“The expenses are viewed by investors as guaranteed, while future income on rates is likely but not guaranteed,” said Piper Sandler analyst Stephen Scouten. “That’s the issue.”
Indeed,
Aside from Wall Street behemoths and some major regional lenders, most banks generate the bulk of their profits on the difference between what they earn on loans and pay out on deposits — the net interest margin. In a
What’s more, the Fed typically hikes rates when the economy is steadily expanding, and the U.S. job market is healthy. Under these conditions, borrowers are generally well equipped to make loan payments even as rates rise.
Those factors are in place this year, building on momentum from 2021. The U.S. economy advanced at a 6.9% annual rate in the fourth quarter and grew 5.5% for the year 2021 as the country rebounded from a pandemic-induced slump amid
But the economic and employment rebounds have fueled
Open positions outnumber job hunters. Branch turnover has been steady for banks and credit unions since 2020. The challenge has since spread to nearly all lines of business, said B.J. Berrettini, New England recruiting manager for the search firm AJ Consultants.
Broader inflation, too, affects banks' costs for everything from energy to real estate.
The dynamic creates a conundrum for banks: To capitalize on higher interest rates, they need staffers in branches and proven talent to grow loans. But hiring at this level creates a cost burden that investors would criticize before the payoff is realized, Scouten said.
Pinnacle Financial Partners in Nashville, Tennessee, for one, reported strong fourth-quarter profit, and it expects to keep this momentum through the year. The $38.5 billion-asset bank also expects its total expense run rate to climb more than 10% in 2022, driven largely by hiring in new markets, CFO Harold Carpenter said on the company’s earnings call.
BankUnited in Miami Lakes, Florida, painted a similar picture during its recent earnings call, reporting a healthy profit. But the $35.8 billion-asset bank projected that expenses, on a percentage basis, could rise in the mid-to-high single digits this year.
Chairman and CEO Rajinder Singh cited the tight labor market. “It is a tough expense environment,” he said.
Pinnacle, BankUnited and a host of other lenders absorbed hits to their stock prices after discussing the higher costs.
The expense challenge is a key area of focus and a likely culprit for the recent pullback in bank stocks, according to Robert Bolton, president of the bank investor Iron Bay Capital.
But barring a major pandemic surprise, he said, the consensus view among market participants is that the economy will continue to expand this year and the Fed will have to steadily boost rates to prevent it from overheating.
“Most banks are well prepared for that and will benefit,” Bolton said. Meantime, bank stocks have “hit a wall.”
Banks’ fourth-quarter results were collectively strong, Bolton said. Loan growth gained momentum and credit quality remains exceptional. Banks are flush with capital and have multiple avenues to pursue to deploy it, he said.
If stocks were to dip further, more banks could buy back their shares to reduce outstanding stock and bolster earnings per share, Bolton said. Dividend increases in 2022 are likely as well. Merger and acquisition
“All of these things point to banks being in pretty darn good shape before we even talk about higher interest rates,” Bolton said. “When rates do rise — and I do think it’s almost inevitable — that adds on to what’s already a pretty positive pile.”
