Post-Election Rally Helps U.S. Bank Shares End 2016 On A High Note, With JPMorgan Leading The Pack
Bank shares – and investors – had reason to celebrate towards the end of 2016, as the U.S. election triggered a rally across sectors in the U.S. equity market. While market-wide gains were due to expectations of a more corporate-friendly environment in the U.S. under the new political regime, bank shares gained in particular from optimistic rate hike projections by the Fed in early December (see How Are Net Interest Margins Going To Change For U.S. Banks Going Forward?). In fact, many of the largest U.S. banks saw share prices reach an all-time high by the end of the year – a list that includes JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB). Such a reversal in fortune for the banks was hardly expected by investors, as bank shares took a beating over the first half of 2016 as the Fed’s repeatedly delayed rate hikes due to lukewarm economic conditions in the country. While the threat of a slowdown in China also loomed over this period, the situation was made worse by U.K.’s unexpected decision to leave the European Union – an event that led bank shares down to multi-year lows in July 2016.
The S&P 500 ended the year with gains of 8.6%, while the Dow jumped 12.6% in 2016. In comparison, the KBW Bank Index gained 23.8% over the year 2016. Notably, the KBW Bank Index fell 1.6% in 2015 and had gained 7.2% in 2014. JPMorgan stood out among all major U.S. banks with its share price swelling 38% in 2016. On the other hand, State Street saw its share price decline by 1% over 2016.
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The table below summarizes the change in prices for major bank stocks in 2016, along with the change for each year over 2012-2015 for easy comparison.
| 2016 Change | 2015 Change | 2014 Change | 2013 Change | 2012 Change | 2016 Close | 2016 High | 2016 Low | ||
| JPMorgan Chase | 37.9% | 5.5% | 7.0% | 33.0% | 32.2% | 86.29 | 87.39 | 52.50 | |
| Goldman Sachs | 23.5% | -7.0% | 9.4% | 39.0% | 41.1% | 239.15 | 245.57 | 138.20 | |
| Bank of America | 23.5% | -5.9% | 14.9% | 34.1% | 108.8% | 22.10 | 23.39 | 10.99 | |
| BNY Mellon | 16.8% | 1.6% | 16.1% | 36.0% | 29.1% | 47.38 | 49.54 | 32.20 | |
| U.S. Bancorp | 14.3% | -5.1% | 11.3% | 26.5% | 18.1% | 51.37 | 52.68 | 37.07 | |
| Citigroup | 9.8% | -4.4% | 3.8% | 31.7% | 50.4% | 59.43 | 61.30 | 34.52 | |
| Morgan Stanley | 8.9% | -18.0% | 23.7% | 64.0% | 26.4% | 42.25 | 44.04 | 21.16 | |
| Capital One | 5.7% | -12.6% | 7.8% | 32.3% | 37.0% | 87.24 | 91.64 | 58.03 | |
| Wells Fargo | 0.5% | -0.8% | 20.8% | 32.8% | 24.0% | 55.11 | 58.02 | 43.55 | |
| State Street | -1.0% | -15.5% | 7.0% | 56.1% | 16.6% | 77.72 | 81.91 | 50.60 |
The sharp movements in share prices over 2016 for each of the largest U.S. banks is seen clearly from the chart above. Despite the precipitous fall in share price over the first half of the year, the trend reversed over the third quarter followed by a sharp rally over the last two months – more than making up for the initial loss in value.
Investor confidence in the banking sector has improved considerably since 2011, 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 portends sustainable growth in the future.
With the Federal Reserve expecting three rate hikes in each of the next three years, the current low-interest rate environment should slowly normalize in the future. While the country’s economic indicators remain strong, a steady increase in interest rates should help the banks realize higher profits from the large loan bases they have built over recent years.
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