The World’s Best Banks 2022: As Covid Recedes, Banks Get A Boost From Higher Rates But Inflation Could Spoil The Party

After more than a decade of declining interest rates, the Federal Reserve announced a quarter-point rate hike last month, the first since 2018, and signaled more to come in 2022, as many as six, in order to combat inflation.

This should improve banks ability to earn net interest margin, the lifeblood of most banks from an earnings standpoint and could be mimicked in other large economies at a time when inflation is causing damage to global economies and other central banks look to take similar action.

Mike Mayo, managing director and head of US large-cap bank research at Wells Fargo Securities, says that 2021 was a strong year for large investment banks that could aggressively take advantage of a bull market and tailwinds of a soaring stock market. However, Mayo says 2022, with its troubled markets, will produce headwinds for those financial titans and serve as a “passing of the baton in the banking industry” to Main Street banks that will thrive amidst the pandemic recovery that brings along more volumes of deposit and loans along with the aforementioned rising interest rates.

As the world emerges from two difficult pandemic years, the US economy has improved dramatically at a breakneck pace. Gross Deomestic Product grew at 5.7% in 2021. However, the pandemic has left behind supply chain challenges and outsize inflation that keeps hitting new highs, the latest being a 8.5% measurement for March, the highest since 1981.

Despite runaway inflation, economists think inflation will recede soon. Swiss banking giant UBS is predicting that inflation for the rest of 2022 will drop to as low as 3.4% by December.

“The US economy is coming online faster and stronger than other parts of the world,” Mayo says. “As a result we will likely see a pickup in Main Street banking in terms of companies increasing their buildup of inventory and their capital expenditures and consumers drawing down their excess savings to spend and travel.”

Bank stocks have had an underwhelming run in early 2022. While there have been marketwide struggles, the S&P 500 is down nearly 6.5% CK year to date, financial stocks have suffered even greater losses with the iShares US Regional Bank ETF down more than 10% CK year to date. This comes on the heels of a strong year for bank stocks, with that same iShares ETF up 38.9% last year, outpacing the S&P 500 at 26.89% in 2021.

“We are facing challenges at every turn: a pandemic, unprecedented government actions, a strong recovery after a sharp and deep global recession, a highly polarized US election, mounting inflation, a war in Ukraine and dramatic economic sanctions against Russia,” said Jamie Dimon, CEO of the largest bank in the US JPMorgan Chase
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in his annual letter to investors.