Bank Stocks Face New Test as Hawkish Rate Hike Signals Steeper Hiking Cycle

SPEAKER_1 (0:00)

It's time now to take a look at the banks, the financial sector. Joining me right now, Dory Wiley, President and CEO, Commerce Street Holdings, and Stephen Biggar, Director of Financial Research, Argus Research. Great to see you both, glad you're here. So, let's start with this, Stephen Biggar. What did you think about the Fed's rate hike last week? Many say it was undeniable, couldn't get out of it. Was it a one and done, or does it continue, and why does it matter? Your thoughts on what's going on here?

Stephen Biggar (0:28)

Yeah. Hi, Nicole. I think the quarter point itself was as expected, but I guess you could say the tone of the conference and the presser itself was a little more hawkish, and the vote was unanimous, which I think was not the expectation. I think that introduced this fear that it may not be a one and done, as we expected prior to the conference. Some large regional banks were down 5 percent on the afternoon of the announcement, and I think that clearly there was some angst in the commentary and press release after the press conference afterwards.

So yeah, I think this was a case of the expectations were a little bit more dovish coming in and the worry is that the higher rate environment will crimp loan growth a little bit more than expectations. That raises borrowing costs and tends to reduce the pace of loan growth, and credit card quality issues have to be back on the table. If there's a more of a slowdown to the economy.

SPEAKER_1 (1:29)

Thank you for that. Dory, some of your thoughts here on this Fed rate hike, and a look back to 2022 Why that matters, what's different or similar? You tell me.

Dory Wiley (1:41)

Well, first of all, I think Warsh was drug kicking and screaming into the rate hike. They had to make it unanimous in addition to it was already priced into the market. So he really had no choice. But it's very different than what happened in 2022 where we had 500 basis points. When you have a rapid, rapid change in the environment, you know, it can be really hard on stocks and then changes in the discount rate. But if you look in the past in the slow rate hike environment, which I think most people think one or two hikes here at most, then, you know, stocks respond very well. And as long as earnings are still there, I think that still bodes very well for the stock market in general. It might put a little pressure on the banks in the short term. Deposits are extremely sensitive to rate hikes right now.

Commercial loans being refinanced at higher rates makes it a little bit tougher. But for the most parts, a bank shouldn't be under too much pressure, but I don't see them going up in the short term while there's this uncertainty of rates going up.

Stephen Biggar (2:46)

All right.

SPEAKER_1 (2:46)

We'll talk about that more. I was looking at the XLF, for example, that hit a low in the spring, hit a high just a short time ago over this late summer, but has been pulling back some. In the meantime, Stephen, you do at Argus have buy ratings on several of the big money center banks, and we can go through those, but it's more about the story. Why buy ratings on big banks now?

Stephen Biggar (3:13)

Well, I think the positive narrative that continues for banks generally, and the big banks in particular, the money center banks with larger capital markets operations, would be that the economic growth story continues here, and that contributes to the loan growth, not anything barn burning, but low to mid single digit type increases. You've got low unemployment, not keeping credit costs manageable. That's very important for banks in terms of their income statement.

You've got a nice improvement story in terms of expenses with AI helping. A lot of banks are just maintaining the line when it comes to headcount and getting efficiencies through AI. And then again, for those capital markets centric banks, you've got booming businesses there in terms of investment banking, bond issuance. So banks are playing a pivotal role here in financing the AI infrastructure. So that's really behind some of this. I think we're kind of early innings still in a lot of that. And so quite a bit more upside for the capital market centric banks.

SPEAKER_1 (4:19)

Five ratings are JPMorgan, Morgan Stanley, Goldman Sachs, and PNC Financial. And Dory Wiley, you like Citi a little bit more than the other Citi bank. So I wanted to also talk about some of the concept story that you mentioned, whether it's consumer credit or earnings that we'll start to hear from in October.