U.S. banks’ three-stage pandemic recovery remains on track
Two years into the pandemic, the recovery of U.S. banks continues, with the latest quarterly earnings results reaffirming our favorable view of regional bank equities and the industry’s future.
Continuing improvement for banks in the latest quarter
In October, we wrote about the three stages of U.S. bank recovery and the implications for investing in bank stocks. With nearly all regional banks having reported fourth-quarter results as of this writing, the fundamentals appear to be tracking positively. In the wake of the economic shock from the pandemic, we see a multistage bank recovery under way. In 2021, credit fundamentals improved, marking the first stage of recovery and, with the economy normalizing, banks have been able to release credit reserves that they had built up early in the pandemic to protect against loan losses.
During the latest quarter, we saw over 70% of banks beating analysts’ income estimates, and operating income was up 8.5% for the median bank, driven largely by revenue performance that beat expectations.1 Net interest income—the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors—grew 4.1% on a year-over-year basis, exceeding analysts’ consensus forecast of roughly 2.6%.1
U.S. bank earnings are up sharply from their pandemic lows
KBW NASDAQ Bank Index quarterly earnings per share, Q1 2006–Q4 2021 ($)
Source: Bloomberg, as of February 9, 2022. The KBW NASDAQ Bank Index tracks the performance of leading banks and thrifts that are publicly traded in the United States. It is not possible to invest directly in an index. Earnings per share (EPS) is a measure of how much profit a company has generated calculated by dividing the company's net income by its total number of outstanding shares.
The current phase: a bank revenue rebound
In the three-stage recovery, the latest quarter’s results illustrated the transition to improvement in bank revenue. This trend was highlighted by an acceleration of loan growth in the fourth quarter; average loans, excluding loans provided under the federal government’s pandemic-era Paycheck Protection Program, rose 5.5% relative to a year ago and an even stronger 8.4% relative to last year’s third quarter.1 We believe this loan growth provides the foundation for revenue growth in 2022, as loans booked today become the earning assets that are likely to drive net interest income in the quarters and years ahead.
Additionally, bank management teams indicated that their loan pipelines are growing as the economy continues to reopen amid early signs of businesses restocking. With inventory levels depleted and supply chains disrupted, many businesses recently needed to tap into credit from their bank lines. As economic normalization reverses this trend and inventories are restocked, we expect to see growing loan demand. The restocking that had been reported by bank management teams was confirmed in late January, when a report showing that U.S. GDP grew at an annual rate of 6.9% in the fourth quarter also documented an increase in inventories.
Loan growth has reaccelerated across U.S. banks
Loans and leases, all U.S. commercial banks, seasonally adjusted, January 2020–January 2022 (billions of $)
Source: U.S. Federal Reserve Bank of St. Louis, February 2022.
In addition to having catalysts for loan growth, banks have recently seen robust deposit growth. In the fourth quarter, average deposits rose 2.8% over the third-quarter level and 12.4% versus a year ago.1 This deposit growth is also likely to benefit earnings in 2022 and beyond, in our view. The ratio of total loans to total deposits in the U.S. banking system today was about 60% as of February 4—a level that suggests to us that banks are flush with liquidity to lend out as loan demand increases.
Moreover, if the U.S. Federal Reserve lifts interest rates in March 2022—per market expectations, as of this writing—pressure on banks to raise deposit costs could be limited, given banks’ excess deposits today. We believe higher rates should be a tailwind for banks; in a rising rate environment, banks’ net interest margins are likely to expand, benefiting from the higher rates they’ll earn on loans and securities and the still-low level of rates that banks pay on deposits.
Just starting: bank efficiency improvement
Following the credit and revenue rebounds, we believe the final stage of the banking sector’s recovery will be driven by efficiency improvement—a trend that we expect will continue to play out in 2022 and beyond. While banks aren’t immune from the wage pressures seen across today’s economy, we expect bank revenue growth will outpace expense growth through the rest of this year, leading to continued gains in operating efficiency. Banks continue to invest in technology and, as they leverage these investments, we expect to see operating leverage improve.
Additionally, we expect banks to benefit from the U.S. Federal Reserve’s approval last year of many of the large bank mergers and acquisitions that were announced as the economy reopened. As banks begin integrating these acquisitions, we expect that they’ll see reduced overall costs and generate further efficiency improvement.
Expect further support for bank fundamentals
With the economy apparently on track to continue returning to full strength, we believe the fundamental outlook for banks remains bright. In fact, we see upside potential to earnings estimates in this scenario, given the revenue rebound that we expect will continue, driven by higher loan growth and higher rates in the years ahead. Taken together, these trends bode well for banks’ prospects.
Finally, for investors, we believe that banks remain attractively valued on both an absolute and relative basis. Bank stocks were trading at 1.29x their book value as of January 31, 2022—a meaningful discount to their long-term average of 1.61x dating to the mid-1990s.2 Moreover, on a relative basis, banks recently traded at about 65% of the forward price-to-earnings ratio of the broader market.3
1 “KBW Bank Earnings Wrap-Up 4Q21, v2: Results Recap; Banks Continue to Trail Market During Earnings Season,” Keefe, Bruyette & Woods, January 31, 2022. 2 FactSet, as of January 31, 2021, for the S&P Composite 1500 Banks Index relative to its average dating to December 31, 1994. The S&P Composite 1500 Banks Index tracks the performance of publicly traded large- and mid-cap banking companies in the United States. It is not possible to invest directly in an index. 3 FactSet, as of January 31, 2022. The 65% figure represents a forward price-to-earnings ratio of 13.03x for the S&P Composite 1500 Banks Index and 19.95x for S&P 500 Index. The S&P Composite 1500 Banks Index tracks the performance of publicly traded large- and mid-cap banking companies in the United States. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. It is not possible to invest directly in an index.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.
This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional
Australia: Manulife Investment Management Timberland and Agriculture (Australasia) Pty Ltd, Manulife Investment Management (Hong Kong) Limited. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Investment Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Manulife Investment Management Timberland and Agriculture Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.
Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.
549532
