Just acknowledging ahead of time that this will probably jinx things, and maybe it’s all too good to be true … but we’ll say it anyway:
The “Big Six” banks look like they’re back.
Morgan Stanley (MS) closed out a strong season for big bank earnings in fine fashion Thursday. The investment bank even got a green light from the Federal Reserve to buy back its own stock.
More importantly, the big overhangs that have been weighing on the sector and investors’ psyches have largely receded.
For the big money-center banks, we’re no longer fretting about balance-sheet health and loan-loss reserves. On the investment banking side of things, the great weights of a dearth of deal activity and sleepy capital markets have largely been lifted.
Business and consumer lending is up (even if rising rates are a new worry for banks’ mortgage operations), mergers and acquisitions are picking up, and return of volatility to markets — as they hit nominal record highs — means good things for I-bank trading desks.
Perhaps most encouraging, the big banks posted better-than-expected results in a quarter in which the U.S. economy actually slowed down. If the economy and corporate earnings really do accelerate in the second half — as they are widely expected to do — the best-performing bank stocks could have even more upside ahead.
As good as the S&P 500 and Financial Sector SPDR ETF (XLF) have been this year, the top-performing big bank stocks have smoked them. Here’s the scorecard for year-to-date price performance:
- Morgan Stanley: +39%
- Citigroup: +31%
- Wells Fargo: +27%
- Goldman Sachs: +27%
- JPMorgan Chase: +26%
- Financial SPDR: +25%
- Bank of America: +23%
- S&P 500: +18%
Indeed, if you created a mini-ETF of just the three top stocks, you’d have a market- and sector-crushing bet that would actually offer some decent industrywide diversity.
A market cap-weighted index comprised of Morgan Stanley, Citigroup and Wells Fargo would have posted a price gain of 30% for the year-to-date, according to data from S&P Capital IQ.
Furthermore, that ETF would give you exposure to a wide swath of the broader industry. MS offers a play on deals, trading and wealth management. Citigroup gives you retail and investment banking, as well as unparalleled international exposure. Wells Fargo, the biggest mortgage lender, plugs you into a resurgent housing market.
MS, Citi and WFC have some key catalysts, too:
- The best news out of Morgan Stanley on Thursday was that it plans to buy back stock for the first time since the financial crisis hit. That’s a huge boost of confidence in its capital position and bodes well for the firm returning even more cash to shareholders in the not-too-distant future.
- Wells Fargo might be seeing a bit of a slowdown in the mortgage business because of rising interest rates, but a steeper yield curve means the bank will finally be able to expand its long-compressed net interest margins — the difference between what the banks pays for deposits and charges for loans.
- Citigroup, once the bank-bailout poster boy, is by far the most diversified U.S. bank, with operations in more than 100 countries. Despite global weakness, that sprawling footprint actually boosted profitability in the most recent quarter, as credit quality improved throughout the world. When global sluggishness finally turns into acceleration, Citi is uniquely positioned to profit.
The bottom line is that if you’re bullish on equities, you have to be bullish on financials — and banks, in particular. The market doesn’t deliver sustained gains without them.
And if you’re looking for outperformance among the Big Six, MS, C and WFC look to have plenty of upside left.
As of this writing, Dan Burrows didn’t hold positions in any of the aforementioned securities.