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Bank stocks poised for best year since global financial crisis

Global bank shares are on track to post their best year since the financial crisis, benefiting from expectations of higher borrowing costs as rate-setters battle widespread inflation.

An MSCI benchmark that tracks global banking shares – denominated in US dollars – is up about 30% so far in 2021, a stronger performance than the roughly 20% gain for the industry-wide measure. of the index provider.

Banks have not posted such gains since 2009, when a similar MSCI stock index rose more than a third as lenders recovered from the depths of one of the worst crises to hit. to the financial industry.

US banks in particular has been driven by the good volume of their commercial businesses in recent months, along with “Extraordinary” trading consulting activities Scott Ruesterholz, a fund manager at Insight Investment, said the release of reserves to cover bad debts. “It’s an extraordinary environment to operate in.”

The KBW index, which focuses on US banks, is up more than two-fifths this year, positioning the index for its best-ever annual performance. That improvement stands in stark contrast to 2020, when the same index fell about 14% as the pandemic prompted central banks to cut interest rates to record lows, compressing the interest rate differentials that banks customers charge their customers for loans and what they owe to customers. deposits.

The performance of banks around the world has varied over a longer period of time, with the US outperforming Europe. On a five-year basis, the MSCI index, which focuses on US banks, is up more than 60%, while the European equivalent (in dollar terms) is down 2%.

The Rebased to 100 line chart shows that Bank stock has broadly outperformed a broader measure of companies.

Beata Manthey, an equity strategist at Citigroup, said banks tend to watch the movement of 10-year US Treasuries, who expect benchmark government bond yields to hit 2% at the beginning of this year – up from the current level of about 1.6%. Bond yields are inversely proportional to price.

Mark Haefele, chief investment officer at UBS, noted that along with energy stocks, “financials do well from the recovery but if there are excessive inflationary pressures, they might as well do well from there.”

US Consumer Price Index, a key inflation indicator, showed an increase of 6.2% in October from a year earlier – marking the fastest increase since 1990. Inflation in the UK reached 4.1% isame month, data is shown for last week.

In turn, traders are now betting that Bank of England will increase borrowing costs to 0.25% in December, from the current 0.1%, following the BoE’s surprise decision to keep rates steady this month.

Then the markets are factoring “may” [0.75 per cent] Alex Wright, fund manager at Fidelity, says 1% interest in the UK by the end of next year. Such a scenario, he said, would boost UK retail bank NatWest’s profits by 24%, while adding 12% to Lloyds earnings and 8% to Barclays.

1 percentage point increase [at the ECB and the Fed] That would also increase US bank earnings by 17% and European earnings by a quarter, said Stuart Graham, an analyst at Autonomous Research.

Those potential gains bolstered analyst optimism. Half of the investors surveyed by Bank of America this month said they were overweight European banks, the highest percentage on record, based on data from 2003.

Bill Nygren, chief investment officer for US equities at Harris Associates, is optimistic that bank stocks will continue to rise, albeit from lows. “We went through a long steep decline and now we have this little rally up a rabbit hill,” he said. “But we think ‘normal’ might be a little bit higher than today.”

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