Advertisements

We have seen the 10 years treasury yield bottoming out at around 1.15% between July and August, after hitting post pandemic high of around 1.75% in March this year. Currently the 10 years treasury yield stands at around 1.312%. This has created a positive effect on steepening of the yield curve, which is good news for the banks.

Treasury Yield 10 Years
Financial Select Sector SPDR Fund

According to Chairman Powell at Jackson hole, there is a very high likelihood that tapering could begin by the end of the year. If this materialise, we could see the yield curve steepening further in the next 12 to 18 months. I believe that the recent rally in banks’ share price is reflective of both yield moving higher, and the anticipation that it will go even higher in the next 12 -18 months.

Advertisements

Rising tide lifts all ships

Though we know that some financial institutions are going to benefit more than the others due to their asset sensitivity on their balance sheet, I think that the taper would positively affect many banks, if not all. Those banks who are able to reprice their assets faster than their funding cost (primarily deposits) would benefit from this tapering moving forward. Banks that are better positioned include Bank of America (BAC), Well Fargo (WFC) and JP Morgan who have high deposits.

The Biggest US Banks by Total Deposits (2011)

More importantly, when the FED decides to raise the short end of the curve, which is FED fund rates, they would perform better. Custody banks like Bank of New York Mellon (BNY) and State Street (STT) would all benefits if the steepening of the yield curve materialised.

Advertisements

Returning Capital to Investors

Banks have been extremely profitable in the 10 years following the Global Financial Crisis in 2008, resulting in a massive buildup enormous levels of capital on their balance sheet. On the start of the pandemic, banks were restricted on their dividends payout and share-buyback. This suspension was lifted on the 1st of July. When investors are looking at banks shares, dividend and share-buyback are definitely consideration factors. The return of capital in the forms of dividend increase and buybacks will definitely create demand for bank stocks going forward. Post Global Financial Crisis, banks have been very well capitalised and extremely profitable and therefore, this capital actions are expected to continue way into the future.

Please read Disclaimer.