CASE FOR BANKS: Sticky inflation and higher long term bond yields are relative positives for financials, the largest Value sector, and no.2 performer this year. They benefit from recovering loan volumes and being able to charge more for them. This offsets cooling capital market activity that investors never valued highly. They are supported by some of S&P 500’s best cash returns and cheapest valuations, strong capital positions, and still low recession risks. See ETFs for US financials (XLF), banks (KBE), or regional banks (KRE) and smart portfolio @TheBigBanks.
THE YIELD CURVE: Financials performance has historically been driven by the shape of the yield curve. A flattening curve, a narrowing gap between short- and long-term yields, can imply both lower economic growth (a risk to loan growth and repayments) and a smaller gap between the cost of their deposits and what they can charge on loans. This is investors current fear. But as inflation decelerates, as it will, the curve will steepen. This will help financials and Value stocks.
RUSSIA RISKS: These are tiny, outside a handful of mainly European banks. Russia loans are 1/10th the 1998 Russia crisis. Regulations have tightened, capital buffers built, banks now more domestic. Even those with exposure, from UniCredit (UCG.MI) to Societe Generale (GLE.PA) and Citibank (C), will likely see only modest impacts that may have been over-discounted by investors. Unicredit estimates a full write-off of its operation to push its capital ratio down to a high 13%. Societe General estimates a half a point capital ratio hit to losing all its local business.
All data, figures & charts are valid as of 23/03/2022