Here's what investors should do with bank stocks after fourth-quarter earnings

Published Fri, Jan 21 20221:52 PM ESTUpdated Fri, Jan 21 20225:06 PM EST

Fourth-quarter earnings reports from big U.S. banks put a speed bump in the rates-driven rally in financial stocks. Analysts and portfolio managers say the good news is still intact, but investors might consider getting more selective. Bank stocks were jumping heading into the first batch of earnings reports for the industry, which came out last Friday. Those gains were driven by investors anticipating a rebound in loan growth and rate hikes from the Federal Reserve in 2022. Higher interest rates allow banks to charge borrowers more for loans, which can boost banks' profitability. Most U.S. bank stocks pulled back in the past week after reporting quarterly results. The SPDR S & P Bank exchange-traded fund is down 8% this week, while the SPDR S & P Regional Banking ETF has lost 8.3%. Investors reacted negatively to higher-than-expected expenses in reports from Goldman Sachs and JPMorgan Chase . Goldman and JPMorgan are down 9% and 7.6%, respectively, for the week. Plus, after two banner years for investment banking, Wall Street is facing increasingly tougher year-over-year comparisons. "All banks are not created equal," said Gerard Cassidy, head of U.S. bank equity strategy at RBC Capital Markets. "The way to invest is ... you own those so called asset-sensitive names and you own less of the companies that have been relying on investment-banking revenues." Trading revenues should also slow for banks, Crossmark Global Investments chief market strategist Victoria Fernandez said. "Trading really drove a lot of the upside movement from earnings in the previous quarters as the market continued to just grind higher," Fernandez said. "I think this year will be a more volatile year in regards to equity market ... so that's probably the area where we might see a little downside, pulling the banks down." Still, analysts and investors believe banks are primed for a stellar year, as tail winds should more than make up for higher labor expenses or slowing Wall Street action. "Our base case for liking the financials and liking the big banks is still our case right now. It did not change because of the earning season for the fourth quarter. We still think this is going to be a really strong year for them," Fernandez said. In fact, the recent pullback could be a buying opportunity for investors, according to Barry James, president and portfolio manager at James Investment Research. "I don't think I would be afraid of them at this point," James told CNBC's "The Exchange" on Thursday. "It might actually be some good entry points as these prices have come down." RBC's Cassidy believes Wells Fargo and Bank of America in particular should benefit from higher rates. Those stocks are down more than 6% and 5%, respectively, this week. The analyst says other names that pulled back in the past week, but should gain from rising rates, include State Street , Bank of New York Mellon , M & T Bank , Comerica and Citizens Financial Group .

Carlo Allegri | Reuters

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