January 12, 2022
This Friday kicks off CQ4 earnings season with a handful of large US banks reporting pre-open. Our preference to own regional banks over the last ~9 months was based on their ability to deliver loan growth despite difficult demand conditions. By contrast, US large cap banks have delivered very little loan growth, if any, over the last ~12 years. December Fed data showed a ~5.5% increase (best since 2011) in commercial loan growth at large US money center banks. If it continues, this kind of loan growth will likely lead to a period of increased estimate revisions. Estimate revisions are the primary driver of near term stock performance. If realized, our outlook for higher bond yields should lead to improved Net Interest Margins (NIMs) and more upside earnings revisions. Banks (large and regional) are considered a primary beneficiary of a cyclical recovery, which should prove more sustainable than most expect. Most bank investors are value investors and laser focused value metrics. This means, most bank investors are focused on bank capital return plans, which doesn’t drive long-term outperformance. Unsurprisingly, the best performing bank stocks have strong loan growth (in good and bad times), take market share and tend to raise capital, not return it. These are the high-tech/high-touch regional banks that also benefit most from higher interest rates/bond yields.