1) Home builders are down 2.5 percent;
2) Utilities are down 1.7 percent, and;
3) Banks are up 0.7 percent.
I noted yesterday that big-cap banks have had a strong start to the year. Earnings expectations do not seem to have changed; instead they are experiencing a multiple expansion at the start of the year on the prospects for higher interest rates. Big banks have been relatively cheap compared to regional names, and it is interesting to note that regional banks like M&T and Zions have been under-performing money center banks.
The problem I have with this is that while a steeper yield curve does help, what really matters is for short-term rates to go up, particularly since many loans are based on indices tied to short term rates, like LIBOR. Yet short term rates are not rising, so the earnings impact is still muted for banks.
Still, there is a clear move up in big cap stocks so far this year, at the expense of regional banks:
- Bank of America up 7.0 percent
- Citigroup up 3.3 percent
- JPMorgan up 0.9 percent
- M&T Bank down 1.4 percent
- Zions down 1.0 percent
Importantly, several regional banks were upgraded this morning: BB&T was upgraded at JPMorgan, SunTrust upgraded at BMO Capital, noting a recovery in loan and fee growth and a greater decline in expenses than its peers. First Republic downgraded at BMO.
We will be starting earnings season for real next week with many of the big banks reporting. While I see good news in the steepening of the yield curve, I also see lots of not-so-good-news:
1) Loan demand is soft;
2) Mortgage fees are weak;
3) Trading is light, and;
4) Repricing bonds are pressuring portfolio yields.