Banks and the financial sector (XLF) continue to underperform the broader markets (SPY), mainly due to subdued returns on financial holdings on the back of market volatility and geopolitical tensions. Interest rate hikes going forward aren’t helping banks in their expansion of rate spreads but are putting pressure on their credit offtake.
Credit has also been impacted by lower taxes and improved operating performance, resulting in higher cash flow generation. The first quarter helped banks command higher trading revenues amid volatility, but on a sequential basis, trading income could decline due to subdued volatility.
Overall, banks could continue to see marginal growth in the upcoming quarters helped by investment banking, marginal additions in managed assets, and stable net interest income.
Trade wars and North Korea
Trade wars are turning out to be favorable for the United States, at least in relation to China. Both countries have come to terms, with China agreeing on intellectual property rights as well as additional imports from the United States. However, the Trump administration isn’t satisfied with running deficits with its alliances from Europe. That might create some room for China to occupy the place of a global and trade-supportive country.
Trump has also confirmed its meeting with North Korea’s Kim Jong-un in Singapore, sending out positives for equity markets globally. Settling major geopolitical tensions and trade wars could pave the way for the next leg of global growth.
Global asset managers, including Blackstone (BX) and the Carlyle Group (CG), could benefit from these moves since they have global exposure. Banks such as Bank of America (BAC) and Citigroup (C) could also expand their global lending and banking business.
In this series, we’ll analyze the factors that could impact bankers’ earnings and macro performances.