CNBC Pro

Breakingviews: Hedge fund managers including Dan Loeb may be too bullish on bank stocks

Breakingviews
Antony Currie, Dominic Elliott
Share
Daniel Loeb, founder and chief executive officer of Third Point LLC
Jacob Kepler | Bloomberg | Getty Images

Dan Loeb is getting too bullish on banks. In his latest letter to investors in Third Point, the high-profile hedge-fund manager argues that a combination of rate hikes and operating leverage will jack up returns for U.S. lenders and investment banks before any tax cuts or regulation take effect.

Yet Loeb makes some feisty assumptions to arrive at his belief that returns on equity could increase over the next two years by between two and 4.5 percentage points. At the high end of the range, that means JPMorgan and Goldman Sachs could be cranking out returns on equity of around 15 percent, while even laggards like Bank of America and Citigroup would finally cover their cost of capital, at around 10 percent.

He's right that banks have spare lending capacity: the industry has lent out just 79 percent of its deposits, according to data last month from the Federal Reserve. The country's largest bank by market value, JPMorgan, has a loans-to-deposits ratio at just 65 percent. That's a lot of lending firepower that could be more profitably deployed.

More In Pro News and Analysis

CNBC ProMorgan Stanley names stocks that will win as global shipping industry bounces back
CNBC ProHere’s how top international fund managers are navigating Covid spikes, chip shortages
CNBC ProThe stock market continues to keep sellers at bay, offering few reasons to fight the tape