Why Are Bank Stocks Going to Rally?

2016 has been an interesting year for the banking sector. It comes as no surprise that capital markets have come under intense fire from endogenous and exogenous factors. The banking industry is undergoing a massive transformation; it has had to weather intense economic storms in the form of historically low interest rates, a slowdown in global spending, and near moribund commodities markets. The oil price – a major driver of economic growth – has hovered around the $50 per barrel level for several months, despite the well-intentioned powwows of OPEC members. Oil price weakness is one of the major drivers of low inflation across Europe, the US and Japan.

Banks Had Limited Exposure to Oil and Gas Companies

Now that OPEC has agreed to production cuts of 1.2 million barrels per day, analysts are hoping that oil inventories will be run down and prices will start to rise. Weakness in the energy markets has affected banking stocks in a big way. Many banks have exposure to gas and oil exploration companies, and with weakness in commodity prices, many installations have had to close shop. Fortunately, banks have made accommodation for this over time and have been able to cut costs internally by divestiture, mass layoffs, and job enrichment programs. Overall, there is much to be said about the profitability of banks in bearish times.

The FOMC: A Major Catalyst to Rising Bank Stock Prices

As a case in point, Bank of America Corporation is enjoying a bull run. The bank has turned its fortunes around in 2016, notably after the election of Donald Trump to the Oval Office. As can be seen from the above chart, the current price of BAC stock is $22.96, well above the 50-day moving average of $18.05, and the 200-day moving average of $15.13. Much the same is true of other major banking corporations in the US including Wells Fargo & Company, Citibank, JPMorgan, Goldman Sachs and others. On Wednesday, 14 December, the Fed FOMC met for the last time in 2016. In the week prior to the interest rate decision, there was a 97.2% probability of rates rising by 25-basis points. This would put the federal funds rate at 0.50% – 0.75%.

President-elect Donald J Trump is a bulwark for the US economy. His policies encompass massive fiscal stimulus which will invariably benefit banks. As the velocity flow of money through the economy accelerates, lending increases and banks can boost their revenue and earnings potential. Without a rate hike, it is difficult for banks to generate interest-earned income on their loans. Now that the interest rate is higher, and there are at least 2 rate hikes forecast for 2017, fund managers are pushing bank stocks like BAC in a big way. As interest rates rise, the cost of borrowed money increases. Since banks are in the business of lending money to clients they are going to reap the rewards.

How are Personal Loans Going to be Affected by Changes to Banking?

Customers who want to apply for a personal loan are encouraged to shop around. With interest rates on the rise, it is a good time to consolidate debts and pay off more expensive credit card debts as soon as possible. With sticky wages, it is always difficult to conjure up additional personal disposable income. The job market is still tight, and one way that customers can accelerate their loan repayments is by shopping around at the banks that they are using. For example, Bank of America Corporation is cutting costs dramatically by moving to a cashless-style system of banking.

Coins and cash are slowly being removed from the banking operations in favor of a digitized system of banking. Additionally, Bank of America is heavily invested in ATM technology that does not accept cards – it is a Fintech innovation that relies on mobile technology and digital transfers of funds. Innovations like this, disruptive though they may be, are lowering costs at banks and putting more money into the pockets of consumers. By reducing expenditure on things like bank fees, paper, commissions, and sundry expenses, it is easier to pay off personal loans and credit card debt.