When the stock markets increased their hopes on a rate pivot (or an interest rate cut), the Federal Reserve disappointed them once again. Last week, The Feds raised rates again by 25 bps. Inflation is well above the Fed Fund’s rate. The job market is still tight and the bank will stay on the course of higher interest rates.
Banks normally benefit from higher rate spreads. Net interest income usually rises. More recently, the collapse of Silicon Valley Bank and Signature Bank increased fears of a bank run. Banks must increase their cash on hand to dispel those fears. This decreases the high-margin profits from NII, hurting the banking industry.
Investors cannot safely buy large banks or the biggest Canadian banks. In the U.S. Goldman Sachs (GS), JP Morgan (JPM), Wells Fargo (WFC), and Bank of America (BAC) traded lower for the week. In Canada, TD Bank (TD) and Royal Bank (RY) fell. TD is near its 52-week low.
TD, which delayed the closing of the First Horizon (FHN) acquisition, is the least attractive. If it does not renegotiate a better price for the regional bank, shareholders will hold excess goodwill.
Stocks in the bank sector trade at a discount. When confidence recovers, consider starter positions in the bank names mentioned.
