US banks online for a windfall after the progress of the Covid-19 vaccine

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U.S. banks are set to reap a quick and significant windfall from an early Covid-19 vaccine after positive test data from Pfizer and BioNTech pushed up long-term interest rates.

The dramatic development in the bond market, if continued, could translate into improved loan earnings, analysts, executives and the banks’ own forecasts say.

Stephen Scherr, chief financial officer of Goldman Sachs, told a conference on Monday that vaccine news “will be good for the banks” giving rise to “reflation results” and “more slope towards the yield curve “.

The economy could grow faster than before if a widely distributed vaccine eased social restrictions and the improved outlook justifies higher interest rates that will improve bank income on loans.

The yield on 10-year Treasuries – often used as a rough indicator of bank profitability up and down – fell from 0.82% to 0.96% on Monday on the Pfizer and BioNTech news ahead of stabilize around 0.92%.

Shares of major US banks followed, with JPMorgan Chase and Bank of America up 14% on Monday.

There have been even more surprising moves from large regional banks that are heavily exposed to commercial lending: Comerica and M&T Bank shares rose 20% and 25% respectively. Commercial loans typically charge a variable interest rate that automatically adjusts to changes in market rates.

Quarterly regulatory filings by banks last week revealed how much a change in the rate environment would improve their outlook. America’s four largest lenders would see a $ 22 billion increase in annual revenue if interest rates were 1 percentage point higher than expected in September, across different maturities.

Bank of America, for example, said that if long-term interest rates rose 1% more than expected, it would add an additional $ 3.3 billion to its revenue, while a 1% rise in short-term rate would generate $ 6.4 billion. .

Banks’ profits are largely determined by the difference between their borrowing costs – the interest they pay on customer deposits or for short-term borrowings – and the yield on loans. When interest rates rise, returns rise faster than financing costs.

It is not certain that rates will continue to rise or that the yield curve will steepen – that is, the spread between short and long-term rates will be wider. A steep curve is good for banks, and it steepened sharply on Monday, with the difference between 2-year and 10-year Treasury bill yields increasing to 0.78 percentage points, the widest spread. important since 2018.

The US Federal Reserve has said it will keep short-term rates at their lowest levels until the end of 2023 and buy Treasuries to control long-term rates.

“You need a curve that steepens and absolute rate levels rise, which is the opposite of what the Fed said it would do. The question is whether there is enough growth for the Fed to change its outlook, ”said Brian Kleinhanzl, banking analyst at KBW.

Kleinhanzl and several other analysts have suggested that the sharpness of the rally in bank stocks could be attributed, in part, to short sellers closing their positions. Before Monday, US banking indices were down nearly 30% this year.

A CFO of a large regional bank told the Financial Times that a slight rise in the 2-year yield on Monday indicated “that there are expectations, above zero, the Fed will hike rates over the next two years. “- a positive outlook for the banks.

The executive also suggested that the decline in credit risk was supporting the recovery. “Investors were running around trying to guess how bad the credit was going to be,” the person said, and the prospect of a vaccine lessens the chances that prolonged economic weakness will push businesses and consumers into default.

Mike Mayo, analyst at Wells Fargo, called for the prospect. “One day does not create a favorable environment for banks and one day does not make a rally in bank stocks. But it certainly beats the alternative if you own banks. ”

Additional reporting by Colby Smith

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