BLACKROCK: It's time to buy banks

The world’s largest asset manager is adding its voice to Wall Street’s bullishness on bank stocks.

“U.S. banks have lagged the broader market and European peers year-to-date,” said Richard Turnill, BlackRock’s global chief investment strategist, in a note Monday. “We believe this trend has turned.”

The optimism on banks, which make up most of the financials sector, is widespread. On Thursday, an exchange-traded fund tracking financials saw outstanding call contracts — or bets that an asset’s price will rise — climb to the highest since December, relative to bearish puts, according to Bloomberg.

Banks, and financials more broadly, were expected to get an income boost from higher interest rates and from loan growth on higher inflation. Both of these things haven’t risen as quickly as expected, but investors like Turnill are counting on a turnaround from a few other catalysts.

For example, he singled out a divergence between interest-rate expectations and the performance of the banking sector in late June. Bank stocks rallied even as traders lowered their bets for rate hikes from the Federal Reserve.

“Why? An annual stress test had cleared the biggest U.S. banks, raising investor hopes for more stock buybacks and dividend payouts,” Turnill said.

Turnill sees the Fed’s balance sheet reduction as likely increasing interest rates and therefore the income that banks earn from lending. Regional banks could benefit from this since more of their business involves lending and holding deposits versus the larger firms that combine these traditional roles with investing.

“Another potential help: a looser regulatory grip from Washington,” Turnill said. “The key for deregulation to move forward will be the confirmation of the Fed’s top banking regulator and his immediate guidance on priorities. Filling the vacancies in related government agencies will also be instrumental for deregulation to gain traction.”

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