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JPMorgan Chase boasts a 14% compound annual growth rate.
David Paul Morris/Bloomberg
Banks undergo annual stress tests. Bank investors should expect to face their own next year.
Few fear that the sector will blow up. It’s how it rates as an investment going into the new year that’s up for grabs. On the plus side, the Federal Reserve is expected to raise interest rates, which should boost bank earnings, although the sector is expected to face more regulatory scrutiny, which could dampen performance.
While shareholders were rewarded for being passive sector investors over the past two years, they may need to be more discerning and take an active stock-picking approach going into 2022. Since the market bottom on March 23, 2020, the
SPDR S&P Bank
exchange-traded fund (ticker: KBE) has gained 111%, coming in slightly ahead of the
S&P 500,
which is up 103%.
That type of “rising tides lifts all boats” performance likely won’t be repeated. Banks are healthy, with the biggest ones passing all of their annual stress tests while also passing the very real tests posed by the pandemic. But the catalysts for growth are murky. The pandemic recovery trade is over, banks can’t count on robust trading revenue, and the outlook for deal making is uncertain. That leaves rate hikes and loan activity as the expected levers for growth, though not all banks will benefit equally.
Investors should focus on banks with diversified revenue streams and strong management teams, says Abbott Cooper, founder of Driver Management, a bank-focused investment firm.
JPMorgan Chase
(JPM) and Silicon Valley-based
SVB Financial Group
(SIVB) are two that look especially appealing, he says. No one would accuse either of being cheap. JPMorgan trades at…
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