Investors shun Wall Street banks for Main Street banks

“Financials are one of the most attractive sectors in the market right now” — per CIO of Raymond James’ private client group (via BBG).

The financial sector is the second-best performer of 2022 with a negative return of 0.46% — outperforming the S&P 500 which is down 7%. But don’t be fooled by the negative performance. In the investment world, ‘good’ is beating the S&P 500.

The fate of bank stocks in 2022

Like most sectors, US bank stocks were negatively impacted by the invasion — despite little exposure to Russia. Last week, banks made a partial recovery after the Fed raised interest rates by 0.25% with plans of six more in 2022…

• The bank reaction: Bank stocks — whose loans are more profitable when rates rise — historically benefit in rate hike cycles.
• The Fed’s dilemma: Raising rates too fast risks sending the market into turmoil — but raising too slow risks high inflation remaining.

Several Fed members advocated for a larger rate increase of 0.5% — but the war kept the Fed from raising too fast. A ceasefire in Ukraine could send markets higher, allowing for faster paced rate raises.

Shunning Wall Street for Main Street

Wall Street banks — which conduct more global business — have underperformed compared to Main Street banks.

• Wall Street banks (i.e. Bank of America, Goldman, JPMorgan) are more reliant on merger & acquisition (M&A) activity and trading volume.
• Main Street banks (i.e. Wells Fargo, Citizens Financial Group and Comerica) are more exposed to domestic loan activity.

2020 and 2021 were record years for Wall Street banks, as surges in SPACs and IPOs revved up M&A activity. But 2022 is much cooler — with deals drying up, fewer companies going public and equity capital market fees down over 75%.

Poor market performance of big name 2021 IPOs may also be a caution in others’  plans to go public (i.e. Instacart, Stripe and Reddit).

Investors: Regional banks shine

With a gloomy outlook for Wall Street banks, investors could turn to regional banks — which rising commercial and industrial loan activity may benefit:

• In 2022, the SPDR S&P Regional Banking ETF of US regional banks — is down 1.7% — beating their Wall Street counterparts.
• Per Jefferies analysts — Comerica (NYSE:CMA) and SVB Financial (NASDAQ:SIVB) are expected to have the fastest core net interest income growth (via SA).

On watch: Banks are reporting first quarter earnings in the second week of April — and investors are expecting a sharp drop in first quarter sales at big Wall Street banks.