Banks stocks have taken a hit due to low lending rates. So, one might think that the prospect of the Fed raising rates several times this year would be a promising sign for the financial sector. But, CNBC reports that the Fed may not be able to save financial stocks with rate increases.
As banks have struggled to cut costs and add new sources of income to combat lower rates on lending, investors have kept close watch on the Fed for clues to when officials will raise rates. But even with one rate hike in December and the prospect of more hikes this year, traders say higher rates may not be enough to save financial stocks from their slide.
“Even in the current environment, which is not bad, they’re not really creating value for shareholders,” Nick Colas of Convergex said Thursday on CNBC’s “Power Lunch.”
According to Colas, the bigger problem for financial companies is that their profitability has already taken a huge hit. Colas said financials are returning 6 to 7 percent on capital, falling short of the 8 percent minimum that investors expect. For now, it seems that some investors are giving up, he said.
Investors pay for a predictable rate of return and today with bank stocks they are not getting it. Thus bank stocks are on a downward slide. But stocks that fall commonly bottom out and often present investors with long term value on the cheap. When will it be time to buy bank stocks again?
Bank Stocks to Consider Right Now
24/7 Wall Street reports four attractive bank stock picks for now.
It seems hard to believe, but since the highs that were posted last summer, the bank stocks as a whole are down a stunning 20%, which is more than two times the loss that the S&P 500 put in. The question for investors looking at the group is whether this is a bottom or they have farther to fall. With worries about a slowing economy, harsh election year political rhetoric and weakening capital markets, some are still steering clear.
A new Deutsche Bank research report touches on all the above-mentioned concerns and numerous others, not the least of which is the fallout from bad energy loans, which could be around for years. However, the firm does have bank stocks in its research universe that are rated Buy. We found four that look very attractive now.
The four suggestions are Bank of America, JPMorgan Chase, PNC Financial Services and Wells Fargo. All of these stocks pay dividends and as a point of reference Wells Fargo is one of the top Berkshire Hathaway holdings.
How High Would Interest Rates Need to Go to Help Banks?
The Financial Times looks at banks and the hit they have taken from the Fed’s more dovish stance.
Officials expect to follow up the modest rate rise they brought in before Christmas with only two increases this year, not four as previously envisioned.
The more dovish stance will cost the US banking industry about $5bn, estimates Mike Mayo, analyst at CLSA.
It would appear that to help out the big banks the Fed would need to be much more aggressive in raising interest rates, perhaps four or more times this year. But then they could also through the country back into recession. Perhaps the banks just need to tough it out for the time being.