Bank stocks return to the fore as central banks become aggressive. This is one of the issues addressed by Algebris’ global equity team which started in its analysis from recent communications from two central banks: the Federal Reserve (Fed) and the Bank of England (BoE).
“Last week saw an aggressive inflection from two major central banks, with the Fed chair speaking of an expected reduction in Quantitative Easing (QE) around mid-2022, while the BoE suggested a bullish cycle. rates that could start even before the completion of their buying program – experts say -. Both statements took the market by surprise and led to a substantial upward shift in global yields. ” Although a steeper yield curve is generally conducive to bank equity valuations, Algebris believes that the most important fundamental driver for banks’ earnings is to have yields hike in the short term, and thus the resumption of rate hike expectations should be a significant advantage for the industry. In both the UK and the US, markets are now pricing in around two more hikes by 2023 than estimated earlier this summer (and in the US, the bond market still has another ~ 45bps to go. quoted at the same levels envisaged by the Fed’s official rates for 2024).
“These incremental increases are generally not within analysts’ estimates and can be extremely impactful for some banks (40% potential upside in EPS for a move of up to 100 basis points along the curve for a bank like Wells Fargo, for example). Of course. , the sensitivity is even higher in some parts of Europe (Commerzbank well over 100% upside, for example) “, add from Algebris.