U.S. Bank Shares End 2015 In The Red After Three-Year Rally

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2015 was a roller-coaster year for the U.S. equity market, and for bank stocks in particular. Strong gains over the first half of the year helped the S&P 500 and Dow Jones indices scale record highs in May. But the optimism melted away in August, when concerns about China’s economic condition spiked market volatility – resulting in huge losses across sectors. Although the trend reversed over subsequent months, the market did not regain the levels at which it started the year. The S&P 500 ended the year 0.7% lower, and the Dow shed 2.2%.

An important factor driving share prices over much of the second quarter was the Federal Reserve’s impending interest rate hike. Investors had expected the Fed to announce its first rate hike since the economic downturn as early as July – which would ease the pressure on banks’ net interest margin figures. But with the hike delayed until the end of the year, U.S. bank stocks took a hit. Financial companies in the S&P 500 reported a decline of 3.5% in 2015 compared to a gain of over 13% in 2014. Also, the KBW Bank Index fell 1.6% over the year after gaining 7.2% in 2014.

JPMorgan Chase (NYSE:JPM) stood out as the only major U.S. bank to actually witness a sizable increase in its share price over the year (5.5%). Morgan Stanley (NYSE:MS) was the worst performer among large banks, with its shares sliding 18%. Incidentally, the investment bank had topped the list of banks to gain the most in each of the two previous years, with a 23.7% gain in 2014 and a 64% jump in 2013.

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See our full analysis for Morgan Stanley | JPMorgan | Bank of AmericaBNY Mellon | Goldman Sachs

The table below summarizes the change in prices for major bank stocks in 2015, along with the change for each year over 2011-2014 for easy comparison.

2015 Change 2014 Change 2013 Change 2012 Change 2011 Change   Current 2015 High 2015 Low
JPMorgan Chase 5.5% 7.0% 33.0% 32.2% -21.6% 66.03 70.61 50.07
BNY Mellon 1.6% 16.1% 36.0% 29.1% -34.1% 41.22 45.45 35.63
Wells Fargo -0.8% 20.8% 32.8% 24.0% -11.1% 54.36 58.77 47.75
Citigroup -4.4% 3.8% 31.7% 50.4% -44.4% 51.75 60.95 46.60
U.S, Bancorp -5.1% 11.3% 26.5% 18.1% 0.3% 42.67 46.26 38.80
Bank of America -5.9% 14.9% 34.1% 108.8% -58.3% 16.83 18.48 14.60
Goldman Sachs -7.0% 9.4% 39.0% 41.1% -46.2% 180.23 218.77 167.49
Capital One -12.6% 7.8% 32.3% 37.0% -0.6% 72.18 92.10 67.73
State Street -15.5% 7.0% 56.1% 16.6% -13.0% 66.36 81.26 63.97
Morgan Stanley -18.0% 23.7% 64.0% 26.4% -44.4% 31.81 41.04 30.15

The decline in share prices over 2015 for most of the largest U.S. banks is seen clearly from the chart above. While this marks a reversal in trend from the steady rally over 2012-2014, it was still a far cry from the precipitous fall witnessed in 2011. 2011 was a particularly bad year for banks, with a series of quick, negative developments in the latter half of that year – including S&P’s decision to downgrade the U.S. long term debt rating, a string of mortgage-related lawsuits filed against banks, and Europe’s precarious debt situation.

Investor confidence in the banking sector has improved considerably since then, despite several obstacles along the way in terms of tightening regulatory requirements, the high-profile interest rate and forex rigging scandals as well as poor internal risk-control frameworks at the largest global banks. This confidence has improved due to the diligent efforts put in by the banks to clear their legal backlogs, while improving economic conditions have lent a helping hand to their bottom lines. The U.S. banking giants have put nearly all their legacy issues behind them and have refocused their business models around their core strengths – something that promises sustainable growth in the future.

With the Federal Reserve initiating its rate hike in December, 2016 is likely to be a good year for the banks. While the country’s economic indicators remain strong, a steady increase in interest rates should finally help the banks realize higher profits from the large loan bases they have built over recent years.

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