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Bank earnings
That’s what the third-quarter earnings reports from businesses indicate, based on the numbers and comments. Boosted by booming Wall Street transactions and the release of money previously put aside for Covid-related defaults, each of the six largest U.S. banks by assets reported profit and revenue that surpassed forecasts this week.
Bank of America CEO Brian Moynihan repeatedly stated on Thursday that the company was back in expansion mode, whether it was through loan growth, credit-card signups, or economic indicators such as unemployment levels.
“The pre-pandemic, organic growth machine has kicked back in,” Moynihan said during a conference call with analysts. “You can see that this quarter, and it’s evident across all of our business lines.”
Given the industry’s traditional role as a bellwether for the US economy, resurgent bank results are a good sign for the market as a whole. Bank stocks soared this year after it was revealed that extraordinary government assistance had prevented the worst-case scenarios predicted at the start of the pandemic. Tens of billions of dollars had been set aside by the industry for loan losses that never materialized and the release of those reserves boosted profits this year.
However, because consumers and businesses were flush with cash, they didn’t need to borrow on credit lines, resulting in the industry’s loan growth being slow. However, in the third quarter, the dynamic shifted: According to the company, loan balances at Bank of America increased 9 percent on an annualized basis from the second quarter, owing to strength in commercial loans.
JPMorgan Chase CFO Jeremy Barnum told analysts on Wednesday that spending levels that are roughly 20% higher than before the pandemic will eventually result in more credit-card balances and loan growth should accelerate into next year.
JPMorgan executives are investing heavily in credit-card marketing and rewards in order to capture “our fair share of the growth in spending as we emerged from the pandemic,” according to Barnum.
This means that banks’ loan books are set to grow while the industry continues to benefit from reserve releases and historically low default rates. Add rising interest rates as the Federal Reserve eases accommodative measures taken to avert an economic collapse, and bank profitability is set to skyrocket.
“What we’re hearing from the banks is, let the good times roll,” Mike Mayo, a veteran bank analyst at Wells Fargo, said over the phone. “Indicators are pointing in a positive direction, whether its loan utilization levels, customer activity, or CEO confidence.”
Furthermore, Mayo stated that banks’ efforts to digitize customer-facing roles and automate back-office tasks have begun to significantly improve their margins. That means that as they continue to add customers, their profit margins will improve — a trend that began in the third quarter, he said.
Other executives, on the other hand, were more cautious. In a conference call with analysts on Friday, Goldman Sachs CEO David Solomon said there is still a risk that the delta variant of Covid will rise again; inflation is concerning; and U.S. political dysfunction or rocky relations with China could slow the economy.
But even Solomon was tempted to declare the pandemic’s end.
“We’ve probably seen the worst of the pandemic’s effects on the global economy,” he said. “As the technology behind vaccines improves, we will make further progress against the virus.”
“Two years ago, we were facing Covid, virtually a Great Depression with the global pandemic, and that’s all in the rearview mirror,” JPMorgan CEO Jamie Dimon said.
Bank of America top stock
Every quarter, the Wall Street firm publishes a list of what it calls its thematic primer picks, all of which are rated buy by the bank. According to BofA, these primer stocks have “material” — that is, high or medium — exposure to their respective themes.
The bank’s Oct. 5 note, titled “Transforming World – Q4 2021 Thematic Primer Picks & Stocklists,” covers topics such as the post-Covid world, the future of work, big data, and artificial intelligence.
Picks for stocks
The Covid-19 pandemic has accelerated the shift to e-commerce, as shoppers increasingly make purchases through social media platforms. According to the analysts, “there is a $2 trillion transfer of value between bricks and mortar and online clicks.”
Squarespace, a website builder, is one of several new additions to the e-commerce theme. Paysafe and Crane payment platforms, as well as Chinese grocery app Dingdong and top South Korean e-commerce site Coupang, are also on the list. Torrid, a women’s clothing retailer, and Overstock.com, an online furniture retailer, round out the list.
Simultaneously, the pandemic has reshaped the future of work. Organizations all over the world have embraced remote working as the default response to Covid restrictions. In addition, they are increasingly incorporating digitization and automation into their operations. Meanwhile, the rise of the gig economy has cast doubt on the traditional work model.
According to the analysts, sectors such as digital consulting, retraining, childcare, and industrial robots could all benefit from the “future work” trend, which is valued at $14 trillion by Bank of America.
The investment bank favors freelancing marketplace Upwork, AI-enabled on-demand industrial manufacturing marketplace Xometry, legal technology firm Disco, video cloud platform Kaltura, and cloud software solutions provider Intapp in this space.
Meanwhile, big data and artificial intelligence are finding ever-wider applications in a variety of industries. Bank of America is optimistic about the theme’s potential, forecasting “$15.7 trillion in GDP gains across high tech, data analytics, autos, industrials, telecom, healthcare, and financials by 2030.” This quarter’s list includes data-driven marketing technology firm Zeta Global, precision medicine company Relay, financial technology solutions provider MeridianLink, and healthcare solutions providers Convey Health and Bright Health.
Among the companies chosen by Bank of America are several with exposure to multiple themes. Amazon and Microsoft rank first and second, respectively, with exposure to 16 themes, while Alphabet has exposure to 15 themes.
Clean energy
India outperformed other emerging market peers by 30 percentage points in less than six months, owing in part to a favorable global environment, according to analysts at the US investment bank in an Oct. 6 note.
“India appears well positioned to enter a new profit cycle, which could result in earnings compounding at more than 20% per year for the next 3-4 years,” Morgan Stanley analysts said.
They cited early signs of capital expenditure, “supportive government policy for a higher corporate profit share in GDP, and a robust global growth outlook.”
This year, India experienced a devastating second wave of Covid infection that overwhelmed the country’s health-care system between late March and early May. It prompted several institutions, including the Reserve Bank of India, to lower their projections for India’s growth rate for the fiscal year ending March 31, 2022.
Morgan Stanley predicts that India’s consumption will increase in 2022. The bank also predicted that the Reserve Bank of India would move toward policy normalization, implying that interest rates would likely rise again as the central bank transitioned away from its ultra-supportive policy measures aimed at bolstering the Covid-hit economy.
The Wall Street bank also predicts that the manufacturing sector will account for a larger share of the country’s GDP.
Morgan Stanley’s stock picks for 2022 are as follows:
Defense and clean energy
According to Morgan Stanley, renewable energy is inexpensive, and the sector will likely benefit from favorable policies and technologies, which could lead to significant growth in the coming decade.
In the defense sector, the Indian government is attempting to increase local production of defense equipment through a variety of policies, including an import ban on certain equipment and budgetary allocations for local procurement.
Larsen & Toubro, Tata Power, NTPC, and Havells are among the companies recommended by the bank.
Pharmaceuticals and real estate
Production ramp-ups and product launches are expected to drive value in the pharmaceutical sector, with Morgan Stanley recommending Sun Pharma and Dr. Reddy’s.
Residential demand in the property sector is expected to be driven by more affordable homes, low mortgage rates, and pent-up demand, according to the report.
According to the bank, commercial leasing will remain weak. Prestige Estates, a real estate development firm, is recommended.
Banks and financial institutions
According to the report, India’s non-bank financial companies, or NBFCs, are expected to have stronger balance sheets after Covid-19. Nonbank lenders typically lend to consumers, farmers, and small and medium-sized businesses.
According to Morgan Stanley, banks are on track for a “strong cyclical recovery” driven by lower credit costs and the start of new loan cycles. Cyclical stocks are those that rise when the overall economy strengthens and fall when it weakens.
SBI Card, ICICI Bank, HDFC Bank, and Axis Bank are among the stocks recommended by Morgan Stanley.
Automobiles and aviation
The automotive sector in India is expected to benefit from a sharp recovery in auto demand as well as acceleration in the adoption of electric vehicles.
Meanwhile, Morgan Stanley anticipates a recovery in domestic travel and a rebound in international travel, which will drive margins higher.
Maruti, Ashok Leyland, and Motherson Sumi are among the automakers recommended by the bank.
