In the current market, Brexit is on the minds of many investors. While it should be a consideration across all asset classes, investors should be cautious in potentially avoiding opportunities that could likely profit. The banking sector is one industry where Brexit could provide for some differentiation.
The U.S. market has primarily proven Brexit to be an anomaly thus far, regaining most of its post-Brexit losses. The futures are also pointing higher for stocks ahead of the holiday weekend, and GDP was revised up this week to 1.1% SAAR for the first quarter. With momentum in the U.S.’s favor, banking stocks are one sector where investors could potentially profit from some overselling and gain incrementally from regulatory improvements.
This week banks received the results from their annual stress test. The annual stress test is done in two parts and is formally known as the Comprehensive Capital Analysis and Review. The first part of the annual testing focuses on the capital ratios of banks. All 33 banks submitting stress tests passed the first part of the annual stress testing, which is primarily focused on common equity tier one capital ratios and tier one leverage ratios.
On Wednesday of this week, the Federal Reserve released its results for the Comprehensive Capital Analysis and Review stress testing with 31 of 33 banks passing. The CCAR requires the banks to submit reporting on how their firms would manage two specific adverse economic scenarios provided by the Federal Reserve. The stress test is designed to ensure that banks have sufficient capital adequacy plans with guidance also from the Federal Reserve on common equity tier one capital ratios and tier one leverage ratios. The annual CCAR testing incorporates some of the current Basel global guidelines; however, the CCAR is the only required test for U.S. banks.
Improving valuations and the week’s CCAR results are key reasons why investors can look to banking stocks in the near term for some upside gains. Passing the CCAR allows banks to increase both share buybacks and their dividend payouts, factors that will help share prices in the near term.
The following chart shows the expectations for banks in regard to share repurchases and dividend payouts.
For the week, banking stocks in the Dow Jones Industrial Average are higher. JPMorgan (JPM, Financial) has gained 4% and Goldman Sachs (GS, Financial) has gained 4.5%.
In the U.K. banking stocks have less to build from with potential to fall further given the current U.K. economic environment. On Thursday, Bank of England Gov. Mark Carney reported that England would be easing rates with potential rate decreases in the near term. As the U.K. economy slows following Brexit reform, banks will also be lowering rates which could lead to even lower profits. The Bank of England will be meeting in July and August, both of which could result in a central bank rate decrease.
In the U.S., the Federal Reserve has four meetings left this year with its September meeting including projections and a press conference. Actions taken by the U.S. central bank would include tightening monetary policy or increasing rates which could help U.S. banks in terms of profit and earnings. Inflation is near the Federal Reserve’s 2% objective and GDP was revised up this week to 1.1% SAAR for the first quarter. Regardless of the U.K.’s Brexit reform, U.S. economic indicators appear to be slightly improving in favor of a rate increase. As a result, investors will be closely watching the June employment report to be released on July 8.
Disclosure: I do not own any shares of any stocks included in this article.
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