Big Banks’ Meltdown Overblown

Higher Expenses and Geopolitics:


Capping off 2021, the cohort of big banks had the perfect set-up with secular trends via a confluence of a rising interest rate environment, post pandemic economic rebound, financially strong balance sheets to support expanded buybacks and dividends, a robust housing market and the easy passage of annual stress tests. As earnings season kicked off in January 2022, investors saw a step-up in expenses, specifically wage inflation. Bank of America (BAC), JPMorgan Chase (JPM), Morgan Stanley (MS), Wells Forgo (WFC) and Goldman Sachs (GS) all reported very strong quarters however investors couldn’t look past the increasing expenses and these stocks sold-off as a result.


To exacerbate the sell-off across the financials, the geopolitical backdrop with the Russian/Ukraine conflict paved way for a second leg down. This one-two punch resulted in BAC, JPM and GS selling off 18.3%, 22.3% and 22.6%, respectively from their 52-week highs through the first week of March. As Jerome Powell sets the stage for an economic “soft landing” with the clear commitment of raising interest rates by 25-basis points and the geopolitical headwinds inevitably abating, the big banking cohort looks appealing at these levels.

Immaterial Geopolitical Exposure:


The big banking cohort has minimal to no direct exposure to Russia thus the second leg down in this space is not tied directly to the geopolitical conflict. This is especially important as the geopolitical tensions rage on and possibly snap up these stocks as a function of overall market sentiment. Overall, the big banks generate an inconsequential amount of revenue from Russia, per Bank of America’s analysis of regulatory 10-K filings.


It is noteworthy to highlight that the impact of the Russian financial carnage as a function of unprecedented sanctions may expose any indirect exposure through emerging markets and/or currency markets. All banks provide disclosures of country-specific exposure of loans, securities and outstanding obligations as a percentage of assets.


For example, BAC, JPM and MS do not have direct exposure to Russia in their regulatory filings. However, GS is estimated to have $940 million total exposure to Russia and Ukraine, or less than 0.1% of its total assets, per Bank of America. Citigroup (C) had $9.8 billion exposure to Russia, including $5.4 billion in Russia-specific exposure, equating to only 0.3% of the bank’s total assets. As such, there is not a single company within the collective big bank cohort has any more than 0.3% of its total assets exposed to the Russian/Ukraine conflict.


Inflation and Rate Hikes:


Inflation has been raging for months now and continues to set 30-year highs. Consumer Price Index (CPI) readings continue to be very robust along with healthy employment readouts. The Federal Reserve indicated that the central bank would begin withdrawing its stimulatory monetary policies as the economy has reached a point where it no longer needs as much monetary policy support. This pivot in monetary policy by the Federal Reserve sets the stage for the initial reduction in asset purchases and an interest rate hike of 25-basis points. The speed at which rate increases hit the markets will be in part contingent upon inflation, employment and of course the geopolitical backdrop. Although rising rates may introduce some systemic risk, the financial cohort is posed to go higher. Banks should benefit with steady rate increases over time as this feeds into margin expansion on loans and windfalls of interest on the float the bank holds in their deposit base.


2021 Financial Stress Tests Easily Pass:


The 2021 stress tests are especially important as the world faces a geopolitical crisis that may reverberate through the global economy. All this consid