Wall Street strategists are telling investors to buy bank stocks, as they will benefit as the Federal Reserve raises rates. I disagree!
BB&T, M&T Bank, SunTrust and U.S. Bancorp set their post-election highs on March 1. Since then the FOMC hiked the federal funds rate twice, on March 15 and June 14. Only PNC Financial set its all-time intraday and post-election high on Sept. 21. SunTrust remains well below its May 2007 high of $94.18.
Theoretically, higher interest rates should widen net interest margins, but securities “held for trading” will have mark-to-market losses.
Another issue is that most bank stock analysts ignore the Quarterly Banking Profile, released by the Federal Deposit Insurance Corp. I guess Fed Chair Janet Yellen doesn’t either, as she seems to be ignoring cautious comments by FDIC Chair Martin J. Gruenberg.
The FDIC released its Quarterly Banking Profile for the second quarter of 2017 during the last week of August. Gruenberg commented that the second quarter continued to show performance improvements, but loan growth slowed for the third quarter in a row.
The FDIC Chair remains concerned that the banking system faces the challenges of a difficult interest-rate environment. Some banks continue to “reach for yield” buying higher-risk assets with extended maturities. Interest-rate risk, liquidity risk and credit risk is being monitored by the FDIC and remains a focus of supervisory attention.
Scorecard for the Five Biggest Super Regional Banks
When looking at a weekly chart, I consider the 200-week simple moving average (in green) as the reversion to the mean. The reversion to the mean is an investment theory that the price of a stock, will eventually return to a longer-term simple moving average. A stock trading above its 200-week simple moving average will eventually decline back to it on weakness. Similarly, a stock trading below its 200-week simple moving average will eventually rebound to it on strength.
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BB&T (BBT)
The weekly chart for BB&T ($45.24 on Sept. 21) is negative if the stock closes today below its five-week modified moving average of $45.31. The stock is above its 200-week simple moving average of $39.19, which is the reversion to the mean last tested during the week of July 15, 2016 when the average was $35.50. The 12x3x3 weekly slow stochastic reading is projected to fall to 42.01 this week, down from 50.85 on Sept. 15.
Trading Strategy: Buy weakness to my annual value level of $42.32. My semiannual pivot is $45.52. Sell strength to my quarterly risky level of $46.51.
M&T Bank (MTB)
The weekly chart for M&T Bank ($154.42 on Sept. 21) is positive with the stock above its five-week modified moving average of $153.30. M&T is above its 200-week simple moving average of $128.06, which is the reversion to the mean, last tested during the week of Oct. 21 when the average was $116.73. The 12x3x3 weekly slow stochastic reading is projected to rise to 24.36 this week, up from 20.27 on Sept. 15.
Trading Strategy: Buy weakness to my semiannual value level of $150.62. Sell strength to my monthly and annual risky levels of $158.45 and $165.89, respectively.
PNC Financial (PNC)
The weekly chart for PNC Financial ($133.35 on Sept. 21) is positive with the stock above its five-week modified moving average of $127.70. PNC is above its 200-week simple moving average of $95.59, which is the reversion to the mean last tested during the week of July 15, 2016 when the average was $81.40. The 12x3x3 weekly slow stochastic reading is projected to rise to 57.34, up from 56.82 on Sept. 15.
Trading Strategy: Buy weakness to my semiannual value level of $120.75. My monthly pivot is $129.90. Sell strength to my annual risky level of $138.64.
SunTrust (STI)
The weekly chart for SunTrust ($57.01 on Sept. 21) is neutral with the stock above its five-week modified moving average of $55.68. The stock is above its 200-week simple moving average of $43.82, which is the reversion to the mean, last tested during the week of April 8, 2016 when the average was $35.83. The 12x3x3 weekly slow stochastic reading is projected to slip to 40.00 this week down from 40.28 on Sept. 15.
Trading Strategy: Buy weakness to my semiannual and quarterly value levels of $55.65 and $51.56, respectively. Sell strength to my quarterly risky level of $59.13.
U.S. Bancorp (USB)
The weekly chart for U.S. Bancorp ($53.74 on Sept. 21) is positive with the stock just above its five-week modified moving average of $52.07. The stock is above its 200-week simple moving average of $44.53, which is the reversion to the mean, last tested during the week of July 8, 2016 when the average was $39.90. The 12x3x3 weekly slow stochastic reading is projected to rise to 45.28 this week, up from 40.78 on Sept. 15.
Trading Strategy: Buy weakness to my annual and quarterly value levels of $50.37 and $48, 64, respectively. My semiannual pivot is $53.38. Sell strength to my quarterly risky level of $55.07.
Real Estate Lending Lags Potential
Residential Mortgages on the books of our nation’s banks rose to $2.02 trillion in the second quarter, but is still 10% below the pace at the end of 2007. Mortgage lending thus lags its potential.
Nonfarm/Nonresidential Real Estate Loans represent lending to construction companies to build office buildings, strip malls, apartment buildings and condos, a major focus for regional banks. This category of real estate lending expanded to a record $1.36 trillion in the second quarter, up 41% from the end of 2007. This is a potential problem as online shopping reduces traffic at America’s malls.
Home Equity Loans represents second lien loans to homeowners who borrow against the equity of their homes. Regional banks typically offer HELOCs, but these loans continue to decline quarter over quarter, despite the dramatic rise in home prices. HELOC lending declined another 1.4% in the second quarter to $424 billion, down 30.2% since the end of 2007. The Dodd-Frank law makes HELOC lending a paperwork nightmare.
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