Banks Roar Back While Fintech Lenders Struggle

Cooling Inflation Figures And Strong Labor Market Sends U.S. Bank Stocks Up

Bank stocks have posted strong outperformance against the S&P500 in recent weeks after a dramatic sell-off in the first half of 2022. Recession fears fueled by the Fed's rates increases and Russia's war in Ukraine have heavily weighted on bank stocks and the broader market up until the latest rebound from mid-June lows.  

According to some analysts, the bad news has mostly already been factored in for banks and the larger market. However, the rally could stall if the Fed proves to be unable to bring down inflation.

Bank stocks typically fluctuate in price in response to expectations for the economy, and the recent surge happened amid some indications that the economy is getting better.

• In July, American firms kept creating new jobs, inflation declined, and gas costs dropped
• Consumer sentiment has been rising too for the previous two months after reaching a record low in June

Five of the six largest U.S. banks have exceeded the S&P 500's 13% return since the end of June.

• Goldman Sachs and Morgan Stanley stock prices are up 20% and 19%, respectively
• Citigroup and Bank of America both had gains of roughly 17% while Wells Fargo saw an increase of 18%

Fintech Lenders Are Left Squeezed By Higher Interest Rates

Companies such as Upstart, Mosaic, Carvana or SoFi provide consumers with loans to pay for goods like autos, solar panels, and home appliances. These companies typically lend to less creditworthy borrowers not eligible for loans in the traditionnal banking system.

• For example, Upstart serves as an intermediary, using artificial intelligence to find and match borrowers with low credit scores with banks and credit unions for a fee
• Additionally, these fintechs usually bundle their loans into asset-backed bonds which are then sold to investors

However, they must borrow the funds they lend to consumers, which is getting more expensive as a result of the Fed's aggressive rate hikes this year.

Furthermore, while demand for the bonds has declined, the additional return, or spread, that investors want to get for buying the asset-backed bonds over U.S. Treasury has nearly doubled since March to around 3 percentage points.

“Everyone’s cost of borrowing has gone up, and everybody has increased rates,” Billy Parish, Mosaic’s founder.

BENCHMARK'S TAKE

• According to stress tests conducted by the Fed in June, the largest U.S. banks would be able to continue lending to businesses and people in a severe downturn, leaving investors more upside potential or less downside risks
• Still, concerns about a global slowdown and the shrinking of the U.S. economy for two consecutive quarters, a common definition of recession, has weighted on banks' second quarter profits and could continue to do so in the quarters ahead
• Fintech lenders, who have fared well in the low interest rates environment until the end of 2021, have seen their funding costs increase while their customers started falling behind on payments

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Stephen Phillips on Unsplash