(Bloomberg) -- It’s been a long hard climb, but a better-than-expected earnings season is propelling bank stocks back to levels not seen since before the 2023 regional banking crisis, signaling that investors have finally regained confidence in the finance industry.
The KBW Banking Index is up 5.9% since banks started reporting results on Oct. 11, reaching its highest level this week since March 2022. The gains have pushed the gauge up 28% in 2024, outperforming the S&P 500 Index and putting it on track for its best year since 2021 after plunging 24% in 2023.
“The one word that sums up the quarter is inflection,” said Wells Fargo & Co. analyst Mike Mayo. “Banks are at a multi-year inflection point from negative to positive earnings growth.”
Catalysts driving this tipping point include capital markets waking up again, the end of a period of peak bank regulation and the start of the first Federal Reserve interest rate-cutting cycle in five years. Indeed, the latest slate of results indicate that banks are thriving even as the rates they charge borrowers come down. The broader market is rallying as well, with the S&P 500 hitting 46 record closing highs this year alone.
Strong Quarter
“Almost across the board results have been better-than-expected and the stock prices have reacted accordingly,” Barclays analyst Jason Goldberg said. “It was clearly a strong quarter for markets in general, equity markets were up, fixed income markets were up and the banks were a beneficiary of that.”
Wells Fargo shares gained for 10 consecutive trading sessions as of Thursday, their longest winning streak ever, to trade at the highest level since 2018. Morgan Stanley has also been at the top of the pack, with its stock soaring 6.5% mid-week for its best day since November 2020, after the investment bank posted a 32% profit surge in the third quarter. Despite dipping slightly on Friday, Morgan Stanley and Wells Fargo notched gains of 7.9% and roughly 11% respectively since reporting their third-quarter results.
Universal banks and trusts are putting up the most impressive results because of the gains in investment banking and trading, the reacceleration in wealth flows, and the strong growth in wealth loans and sweep deposits, Wolfe Research analyst Steven Chubak wrote in a note on Oct. 16.
That said, smaller regional banks like M&T Bank Corp, Western Alliance Bancorp and U.S. Bancorp also rose after reporting positive earnings this week.
Turning Big Ships
However, gains weren’t uniform across the sector.
Citigroup notably closed down 5.1% on Tuesday after its earnings showed net interest income fell short of expectations. The report also pointed to some weakness in consumer spending and expectations of higher loan losses for the bank’s retail services credit card portfolio in the fourth quarter, according to Evercore analyst Glenn Schorr, who added that it’s “hard to get too excited” about a 7% return on tangible common equity.
Perhaps not surprisingly, Citigroup is the third worst performer in the 24-member KBW Bank Index since the start of October. The lender closed Friday down 1.8%, having fallen 4.8% since reporting third-quarter earnings on Tuesday.
“It takes a long time to turn a big ship,” Schorr said. “And while trading and investment banking fees exceeded guidance, net interest income appeared to disappoint some investors.”
Of course, there’s always a chance that the current sentiment shifts depending on what the Fed does. Markets are pricing an 85% chance of a 25 basis-point rate cut in November, which is inline with hopes that the central bank is sticking a soft landing and keeping the US out of a recession. A slower pace of cuts and a strong economy are encouraging for bank earnings, while a sharp drop in rates due to a weak consumer would weigh on the sector.
“Right now investors seem to think the Fed is threading the needle really well,” said Piper Sandler analyst Scott Siefers.
It’s a welcome change of tune for shareholders who held onto their bank stocks through 2023’s chaos.
“Put a fork in it as it relates to last year’s issues,” Mayo said. “A few smaller banks had problems, but that was never indicative of the entire industry.”
The KBW Index closed out down 0.3% on Friday.
(Updates second chart, shares in second and sixth paragraphs, and adds final paragraph after market close.)
©2024 Bloomberg L.P.
