U.S. Banks Hold Good Prospects For Long-Term Investors

There are substantial reasons for bank stocks underperforming over the past few quarters. Particularly, concerns over the industry’s vulnerability to a flattening yield curve due to the low rate environment, regulatory hindrance, global growth instability, collapse of commodity prices, and the most recent Brexit aftermath kept investors away. But had there not been enough positives to counter, banks would not have delivered competitive earnings numbers. In fact, proactive actions, technical affluence, slow-and-steady loan growth, support from an improving domestic economy and many more positive factors might change the fate of banks over time.           

Moreover, the concerns seem overblown now and perhaps bank stocks are affected more than what was warranted by their fundamentals.

Banks have learned to take the low-rate environment in stride and have earned significant fundamental strength by reorganizing their business models. Moreover, while global economic uncertainty – which has been fueled by Britain's vote to leave the European Union (Brexit) – is weighing on the prospect of a rate hike any time soon, it might not demotivate the Fed for long to tighten the monitory policy to the extent it wants. While the global economy might take a decent time to show resilience, the ongoing improvement in the domestic economy might prove convincing for the Fed.  

At least, the backdrop is not as bad as is needed to keep the rates low for a very long period. Therefore, U.S. banks will undoubtedly get a boost from a rising rate cycle. This, along with the strength in core business earned by passing through dragged out regulatory scanners, should help them reach the turning point of consistent growth before long.

Though the earnings performance over the last few years has failed to garner investors’ confidence, the results depict banks’ efforts in pairing up aggressive actions (like creating new revenue sources) with defensive measures (like expense control) to tide over persistent challenges. Moreover, banks have earned the ability to deal with crises, as evident by the passing of the Fed’s stress test by all 33 banks last month. They can now dodge pressures from the operating environment more easily.

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