Megabanks and regional lenders alike will see a boost from higher interest rates and potential loan growth in 2022, but may be challenged to extend their big stock market gains from 2021.
The banking sector is facing a tougher regulatory and possibly economic environment in the New Year, but lenders will likely see a boost to their margins as central banks lift interest rates to combat inflation.
The view from Wall Street has been bullish, with shares of the larger financial institutions and regional banks turning in strong performances in 2021. As of Dec. 22, Dow components Goldman Sachs GS, +0.71% and JPMorgan JPM, +0.36% have rallied about 45% and 23% respectively in 2021. Wells Fargo WFC, +0.69% has gained 59%, Morgan Stanley MS, +1.06% has risen about 44% . Citigroup C, +1.02% has fared less well, falling 3%.
The Dow Jones Industrial Average DJIA, +0.55% is up about 16.7% for the year while the S&P 500 SPX, +0.62% has risen by 24.7%.
With regional banks boosted by record M&A in the sector, the KBW Bank Index BKX is up about 33%.
While it may be difficult to sustain those types of gains in 2022, analysts have found at least a few things to be cheerful about.
“‘Large bank stocks have sold off and have sharply lagged the S&P 500 since the Omicron news hit. Valuations are attractive and should rise as the Fed starts tightening.’”
JPMorgan analyst Vivek Juneja said bank stocks look healthy for the balance of 2022 but will likely start the year choppy due to omicron variant concerns. The business would then outperform as the Fed focuses on fighting inflation, but the key challenge is whether these actions will manage to tame prices without throwing cold water on economic expansion.
“Large bank stocks have sold off and have sharply lagged the S&P 500 since the omicron news hit,” Juneja said in his Dec. 16 research note. “Valuations are attractive and should rise as the Fed starts tightening.”
Consumer spending and travel may be dampened near term by variant concerns but should recover as COVID-19 trends start to improve, he added. Other complicating factors include potential credit losses, higher expenses for technology and compliance costs, and a “harsher” regulatory environment, he said.
Bank of America BAC, +0.32% is seen as a larger beneficiary of higher rates, JPMorgan said. U.S. Bancorp USB, +0.43% is poised to benefit from a pickup in airline and travel spending later in 2022, while PNC PNC, +0.41% will reap short-term rewards from merger cost savings, as it invests its “large excess liquidity.”
See Also: An improving credit outlook, M&A, higher interest rates and loan growth drive upgrade of U.S. regional banks
Another potential plus for banks is loan activity. According to data from the U.S. Federal Reserve, commercial and industrial (C&I) loans are up 1.9% in the fourth quarter-to-date at large banks, an improvement from the third quarter.
“If this faster loan growth continues into 2022, it would be positive for banks,” Juneja said. “However, competition from non-banks is likely to remain very intense with rates still relatively low.”
On the regulatory front, President Joe Biden has yet to name a candidate as head of the Office of the Comptroller of the Currency after Saule Amarova withdrew her name earlier this month. Another major vacancy is a replacement for Randal Quarles, the first confirmed Fed vice chairman for banking supervision.
Allen Denson, partner at Strook & Strook & Lavan LLP, said uncertainty on the federal regulatory front could stifle innovation at banks.
“A bank is less likely to introduce a new product if the regulatory environment is unknown,” he said. “Banks prefer stability.”
Meanwhile, banks must pivot toward changing consumer behavior by investing in technology to offer more online banking services. Banks may also face challenges to their loan portfolios if they have exposure to commercial properties impacted by lower office occupancy or drops in retail activity.
Overall, the Biden administration has signaled it wants to slow down bank consolidation and support community banks, in an effort to protect consumers, Denson said.
Climate change issues also loom large on the radar for banks in 2022.
The Office of the Comptroller of the Currency last week released proposed principles that would increase bank disclosure on climate risk from fossil fuels in loans.
Also Read: OCC takes step toward pressure on large banks to reveal climate-change risks
The outlook is different for regional banks and mid-sized banks, however. Hovde Group analyst Brett Rabatin said the firm organized nearly 20 meetings in recent weeks with institutional investors in the banking sector and most remain bullish on the sector.
Hovde’s regional bank picks include Colony Bankcorp CBAN, +3.00%, First Bank (N.J.) FRBA, -0.97%, First Internet Bancorp INBK, +0.07%, MVB Financial Corp. MVBF, +2.81% and Sterling Bancorp SBT, +0.82%. Mid-cap picks include First Merchants Corp. FRME, +0.54%, Old National Bancorp ONB, +1.76% and Veritex Holdings VBTX, +1.73%.
“From our conversations, nearly all the investors we met with think the space is primed to outperform the broader market again in 2022,” Rabatin said in his Dec. 17 research note. “Probably the most debated topic of conversation was around loan growth outlooks and whether banks will be able to hit their growth targets next year.”
Some investors believe excess liquidity will be drawn down before significant commercial loan growth transpires, while others were more positive and expect solid growth trends in 2022, he said.
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