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Banks escape from 14 years of NIM suppression after Fed hikes: Mayo says (NYSE:BAC) – Seeking Alpha

Banks escape from 14 years of NIM suppression after Fed hikes: Mayo says (NYSE:BAC) - Seeking Alpha
Written by Amanda

Banks escape from 14 years of NIM suppression after Fed hikes: Mayo says (NYSE:BAC)  Seeking Alpha

Interest.

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With the Federal Reserve raising its key rate by 75 basis points on Wednesday, and a full 3 percentage points over the past six months, banks are escaping from 14 years of net interest margin suppression, Wells Fargo analyst Mike Mayo wrote in a note to clients.

“What seems underappreciated is the degree to which industry NIMs should return closer to normal after having been suppressed for the past 14 years under mostly zero rates,” he said.

He’s cognizant that the forceful rate hikes will slow the U.S. economy, increasing the chance of a recession. Still, banks are in pretty good shape, Mayo notes. “Bank risks are night and day since the GFC (Great Financial Crisis),” he said. “Not every session is a credit crisis.”

Wells Fargo estimates that banks have improved their risk profiles by a fifth, leverage by a third, and liquidity by a half. That should help keep earnings growing even in a recession due to the net interest income tailwind, he said.

He sees “very little evidence that a credit crisis or anything close to it is imminent” given anecdotal comments by bank managements, 30+years of bank loan delinquency data, and early warning signs remaining close to all-time lows.

For specific stocks, Wells Fargo analysts sticks to a “Main Street banking” theme, favoring Bank of America (NYSE:BAC), PNC Financial Services (NYSE:PNC), and Fifth Third Bancorp (NASDAQ:FITB), all rated Overweight by Mayo.

The biggest risk to his call is that the odds of a hard landing have also risen. “Under that scenario, the stocks could trade back to tangible book value,” he wrote. Still, the Fed’s outlook is for unemployment to increase to 4.4% at the end of 2023, vs. 3.7% in August, and stay there through 2024. “While net job losses dampen consumer spend volumes, this implied level of employment would be the lowest for any post-WWII recession,” he added.

Overall, the market isn’t reflecting Mayo’s optimism, with the SPDR S&P Bank ETF (NYSEARCA:KBE) sliding 2.1% in Thursday afternoon trading. The SPDR S&P Regional Banking ETF (NYSEARCA:KRE) is down 2.2%.

Taking a long view of KBE, KRE, and the three stocks Mayo mentions, PNC (PNC), up 119%, is the only one that comes anywhere near matching the S&P 500’s 170% increase over the period of Jan. 1, 2007 (well before the GFC) to Sept. 21, 2022 as seen in this chart.

See why SA contributor Richard J. Parsons, a former banker, calls Bank of America (BAC) a “have” bank poised for a breakout

Source: seekingalpha.com

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Amanda

Hi there, I am Amanda and I work as an editor at impactinvesting.ai;  if you are interested in my services, please reach me at amanda.impactinvesting.ai

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