(Reuters) – After two years of sharp gains for U.S. banking stocks, investors betting on further big boost for the year 2018 could be disappointed, unless loan growth is accelerating or regulations relax considerably.
The S&P 500 bank sector index .SPXBK beat first quarter earnings estimates by 3.1 percent, and the Wall Street 2018 earnings growth consensus for the sector climbed to 32.2 percent at the beginning of may of 28.4 percent on the 1. April, according to Thomson Reuters data.But the strength in trading revenues, net interest margins and lower tax rates of a law by the U.S. Congress in December, was not enough to offset investor disappointment over the growth in lending.
In spite of better-than-expected profits of the S&P 500 bank index sideways trading in the first weeks of the reporting season, the start of JPMorgan Chase in April 13. was As the broader market in early may, won in the industry enjoyed a five-day show rally, a year-to-date gain of 1.2 percent, a far cry from the annual gains of 20 percent in both 2016 and 2017.
The S&P 1500 bank index .SPCOMBKS of small and medium-sized banks, has done little better than to increase the larger banks with 2 percent year-to-date. But even he pales next to 22 percent and 17 percent gains for 2016 and 2017, respectively.
Investors in the banking sector as a way to profit from rising interest rates and economic growth. Some are betting on further gains in the sector, in the hope for the improvement of the credit demand, the more profit growth, rising US interest rates and regulatory relief, such as looser lending, trade, and capital controls.
But others are skeptical that banks will have to rise much more space.
“It is hard to be expected, it’s kind of a home run for the banks,” said Frederick Cannon, Director of research at Keefe Bruyette & Woods.
“Higher prices are the price () in the stocks. The tax debt is in the stocks. The lighter regulatory touch, perhaps we have already seen the benefits of that,” Cannon said.
A potential catalyst for accelerating the growth of lending, but this is not very likely, he added.
Lisa Welch, a portfolio manager at John Hancock Regional Bank Fund in Boston, but expects further gains for the banking stocks, which it believes are undervalued.
The S&P 500 bank index trades at 11.34 times the earnings estimates for the next 12 months compared with the historical average of 12.56.
Welch also expects the 2010 Dodd-Frank financial reform changed the law to increase the size of banks as “too big to fail” and thus subject to heightened supervision. When this happens, it could lead to more Bank mergers and market share gains.
“It is a sector that benefits from rising interest rates, a growing economy and a more favourable regulatory environment, says the trade on attractive valuations”, Welch. They also drew attention to notes by the bank executives during the quarterly results, telephone conferences, the growth of lending would pick up.
But Michael Cronin, Equity Research Analyst at the Aberdeen Standard-Investments in Boston, believes that investing that corporate tax cuts have actually put a damper on credit growth by increasing the liquidity available to the company for the repayment of existing debts or.
He said that a pickup might be in the overall pace of economic growth, in order to speed up lending from current levels. Loans to the largest U.S. banks rose to $5.07 trillion US dollars in April of $5.05 trillion U.S. dollars in March, while commercial and industrial loans rose to $1.18 trillion US dollars in April from $1.16 trillion in March, according to Central Bank data.
“What are we going to see more modest growth of lending. I would not expect a large acceleration in the back half of 2018,” Cronin said. “I’m not sure I see a catalyst for it.”
Charles Peabody, partner at Portales Partners in Chatham, New Jersey, is optimistic that the growth of loans to expand, to increase, if the US companies continue share repurchases and investments.[L1N1SE15G] But he sees any share of the profits from a loan expansion, short-lived, as the acceleration of lending and increase credit costs.
“I don’t expect shares to fall out of bed in the morning, but we are in a peak,” said Peabody. “By the end of this year, when we look back, we see the first half of this year was” the tip.