Banks & Thrifts have tailwinds despite flat Treasury yield curve

The Fed is raising rates as fast as it can, and the Treasury yield curve is flat or inverted. Is this a bad scenario for US banks? Not right now, since the rates banks pay on deposits have risen much less than rates on Treasury bills or the fed funds rate, as is often the case. And wider credit spreads on corporate loans have also helped improve lending margins. Our stock rankings show higher readings for the Financials sector, helped by strong earnings estimate revisions, particularly in mid- and smaller-cap banks and thrifts. Readings above zero on the chart below indicate analysts raising estimates more in Banks than in the overall US market, and recent readings have been far above average.

Used cars in the headlights

According to the latest Consumer Price Index (CPI) report from the Bureau of Labor Statistics, “the index for used cars and trucks rose 10.0 percent in April. This was the largest 1-month increase since the series began in 1953, and it accounted for over a third of the seasonally adjusted all items increase.”

Wow. That’s a big increase in used car prices, and a large influence for something that only makes up 2.7% of the overall CPI basket.

Banking sector facing good news/bad news from macro trends

Given the rebound in the Financials sector’s relative returns recently, and the broader increase in investor interest in Value after a long period of underperformance, it’s worth a look at some of the macro trends in the US banking sector to help identify trends that affect profitability. The data show both good news and bad news for the banking sector.

We first dig into the quarterly data on the US banking sector released by the Federal Deposit Insurance Corporation (FDIC), currently as of the end of Q3 (Sept. 30th, 2020), shown in the chart below. The top section shows the total assets of all FDIC-insured institutions in the US (about 5000 institutions), currently about $21 trillion.