Investors Warm Up To Big Bank Shares, Paring Sector Losses -- WSJ

By Aaron Kuriloff 

Plenty of investors have shunned U.S. bank stocks this year, but some are seeing new hope for the sector.

Large U.S. banks have outpaced the S&P 500 since J.P. Morgan Chase & Co. became the first of the biggest U.S. lenders to beat reduced earnings expectations earlier this month.

The KBW Nasdaq Bank Index of large U.S. commercial lenders has risen 2.5% since July 13, compared with the broad stock-market index's 0.8% gain. Financial shares in the S&P 500 have also outgained the market, rising 1.3% in that time.

While few expect the Federal Reserve to raise interest rates at its meeting this week, investors have new hope that they may one day climb, which could provide an extra boost to banks. Though bets on a rate rise in the near-term all but vanished as markets fell in the wake of the U.K.'s vote last month to leave the European Union, new data suggesting continuing U.S. economic growth has many investors now expecting an increase by the end of the year.

Rising interest rates tend to help banks because they increase the gap between what they charge on loans and pay on deposits, a spread known as the net interest margin.

"If you really want to be a contrarian investor, and are looking for something cheap that got totally left behind and has decent yield, you should look at high-quality banks," said Susan Bao, portfolio manager at J.P. Morgan Asset Management, adding that the firm's $10 billion U.S. Large Cap Core Plus Fund is overweight banks.

Bank stocks' performance is a reversal for the sector, which tumbled at the start of the year as investors worried about the impact of slowing global growth, and again after the U.K. vote convinced many investors that interest rates would stay lower for longer, pressuring profits from banks' lending businesses.

The KBW bank index remains down 7.3% so far this year, and financial stocks are the only S&P 500 sector still in the red.

But after major U.S. stock indexes reached records in a rally led by shares of utilities and staples, which tend to be more stable than the broader market and pay relatively high dividends, some investors have begun to embrace stocks that are more sensitive to economic growth, including financial and bank stocks.

Some investors and analysts noted that many U.S. banks are trading at discounts to book value, or a firm's net worth, despite improving balance sheets, and offer potential dividend growth to the yield-starved.

Dividends have played a role in stock-market gains this year, with the average dividend yield of the S&P 500 higher than the yield on the benchmark 10-year Treasury note, currently at 1.561%.

"Banks took it on the chin, but they could show signs of life," said Matt Peron, head of global equity at Northern Trust. "They're certainly cheap."

Write to Aaron Kuriloff at [e-mail]

(END) Dow Jones Newswires

July 27, 2016 02:47 ET (06:47 GMT)

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