Last night on CNBC’s Fast Money, the group of equity-centric buffoons, of which I am most certainly one, had a short discussion of the impact of negative interest rates on large banks, and specifically Jamie Dimon’s commentary from his shareholder letter on their effects on his bank, JP Morgan (JPM) :
The quote (that might have been taken out of context from the letter) that I found particularly interesting was that Dimon “is not worried about negative rates and diverging rate policies.”
At this stage of the game, 7 years on from the global financial crisis that sent global interests rates to zero, while central banks expanded their balance sheets by trillions at a clip, negative rates in a third of the world’s GDP means that we are likely still at DEFCON 2 in the grand scheme of things. And that drives home the unfortunate fact that crisis monetary responses that evolved into semi permanent monetary policy is still not able to return the global economy to enough sustainable growth to end the policy itself.
So what does it mean for banks? Well, in the wake of the crisis that brought the financial world as we know it to its knees, the combination of massive regulation, massive leverage cuts, massive litigation expenses and fines, the inability to make money on the spread between deposits, weakening capital markets environment and the disinter-mediation of technology on so many levels, means and plain and simple, earnings and sales growth will be constrained in this rate environment. So the Fed’s recent change of heart on rate increases, after its first raise in December since June 2006, suggests that we are closer to negative rates than we are to pre-crisis levels in my opinion.
What to do with U.S. bank stocks? As we have noted on a few occasions of late, they have under-performed the S&P 500 from the May 2015 highs, as well as year to date and most importantly off of the February low. JPM for instance put in a “Dimon Bottom” when he bought $26 million worth of stock between $53 and $54 at the 2016 lows on Feb 11th, and the company last month announced a $1.9 billion buyback. But despite that, the stock is only up 12% from Feb 11th vs the SPX up 14% and maybe more importantly, the SPX is now only 3% from its all time highs made last spring while JPM is 17% from its July 2015 52 week high. It appears that investors are fading Dimon’s commentary.
As we head into Q1 earnings season, where bank stocks are first to report en masse, with BAC, C, JPM and WFC set to report next week, expectations are not exactly high as C and JPM management’s have already talked down Q1 results (which were highlighted by disgusting results from JPM in the Dec to February period). While I would be a tad hesitant to press bank stocks into earnings given low expectations, poor sentiment and even poorer price action, they are likely to be a great trading short on rallies.
For instance, JPM’s inability to establish a new range above $60 is less than encouraging and leads me to believe it will test sub $55 again this year if rates stay here or go lower:
Oh and lastly, I’ll leave you with this chart, of the European Bank Stocks Index (SX7E), how’s QE and negative rates treating bank stocks on the other side of the Atlantic?