Bank stocks are healthy, stable and boring again

In the past 12 months, the financials sector was the second-top performing sector (58% return), behind the energy sector (90% return).

But last week, strong earnings reports from the US’ biggest banks signal one thing to investors: Banks are returning to their stable, predictable selves.

Back like it never left

(Almost) everything is going right for banking stocks as the economy continues to recover from the pandemic:

• Mergers have driven earnings growth for banks – pulling in billions in fees.
• The result: uncharacteristically strong returns from the US’ biggest banks with Bank of America up 55% and JPMorgan up 33% in the past year.

The good news doesn’t stop there – half of the Federal Reserve members expect interest rates to rise next year – which is expected to improve banks’ profitability.

But not so fast, the recovery isn’t complete. Banks are still waiting on one of their biggest profit drivers to return – loan demand.

The missing piece: consumer loans

Total loans at US banks are up just 1% since the end of June, according to the Fed.

Despite credit card spending jumping 30% at JPMorgan last quarter, its credit cards income fell over 20% as people opted to pay balances in full.

But why aren’t consumers taking out more loans?

• Consumers are flushed with cash thanks to the government pandemic relief programs – lowering borrowing demand.
• Growing adoption of buy now pay later (BNPL) payment options – a $100B industry that’s rapidly growing in popularity among younger consumers.

The threat from the BNPL industry has even forced Visa, Mastercard and Goldman to launch their own BNPL offerings. And if BNPL really is having an impact, banks aren’t going to like how fast the industry is growing…

Investors: Back to boring

Banks stocks were historically safe, dividend-paying investments – until they became one of the hardest-hit industries from COVID:

• Prior to the pandemic, the NASDAQ Bank Index (INDEXNASDAQ:BANK) had returned just under 7% annually since 1995.
• After tanking during the pandemic, the same index is up 75% over the last year.

In the long run, investors shouldn’t expect the big returns we’ve seen from banks this year to continue. Stability in the economy should make banks the predictable and boring stocks they’re known to be.