The Institutional Risk Analyst

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Q4 Earnings | Big Banks & QE

January 12, 2022 | Readers of The Institutional Risk Analyst know that US banks have been trapped in a world of shrinking NIM and asset spreads, and flat volumes, through the years of quantitative easing or QE. Over the same period, investment managers bid up banks stocks to silly levels, both in historical terms and also vs asset and equity returns. The Sell Side host has encouraged this evolution of bank valuations.

Source: Yahoo Finance

Now equity market valuations for financials are churning, just as bank fundamentals threaten to improve from the depths of the hunger-winter of 2020. What will professional investment managers do? Real returns on bank stocks, more than non-financials, are impacted by inflation. The latest iteration of central bank market operations took almost 25bp off the return on earning assets for all US banks. Between Q4 2017 and Q4 2020, ROEA fell from 85bp to just 57p in Q2 2021.