Pro Perspectives 7/18/22

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July 18, 2022

On Friday we talked about earnings from three of the big four banks. 
All produced soaring net interest income, thanks to rising interest rates. 
All had solid overall earnings performances, before adding to an already massive war chest of loan loss reserves (although loan losses continue to be low). 
And all had positive things to say about the strength of the consumer. 
We heard much of the same today from Bank of America, the second biggest bank in the country. 
So, the banks continue to be profit printing machines.  When times are unstable over the past fourteen years, they’ve been backstopped by the Fed (de-risked), and incentivized to fuel credit creation to help the economy — from which they make money in loan origination, investment banking and trading. 
When times are more stable, their customer account balances balloon (as they have now), from which they get to earn what is becoming a very healthy interest rate spread from the rising interest rate environment. 
Heads, they win.  Tails, they win.  And the systemically important feature of being one of the biggest banks in the largest economy in the world, means that (as we’ve observed) risk is absorbed/transferred/backstopped by the Fed and government. 
With the above in mind, as we discussed on Friday, the banks are dirt cheap at lower than 10 times next year’s earnings (a straight average of the big four banks).   That’s less than 0.6x the P/E of the S&P 500.
This relative valuation is near historic lows, not only for the big four banks, but for financials on whole, relative to the broader stock market.
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