The health of banks is less dependent on the yield curve than it is on loan growth, writes Oppenheimer & Co. analyst Chris Kotowski in a research note today, reiterating his “Buy” recommendations on the shares of Citigroup, Bank of America, JPMorgan Chase, and Wells Fargo. Kotowski contends that while many believe net interest margin is mostly dependent on the flattening yield curve — meaning, it gets hurt with when the curve flattens — in his research, “there is a good bit of random variabilit in this relationship.” Moreover, “there is a much better fit with the net interest margin and the ratio of loans to earning assets, underscoring the central role of loan growth to future earnings.” On the simple side, Kotowski thinks Citi and others will benefit as loans shrink more slowly: the Fed Reserve’s loan officer survey and consumer durables are both showing positive early indicators in that regard. On a broader level, the banks lost a lot of business to the “shadow banking system,” and they may be recovering those multi-decade losses, Kotowski believes.
Jacob Gaffney is formerly Editor-in-Chief of HousingWire and HousingWire.com. He previously covered securitization for Reuters and Source Media in London before returning to the United States in 2009. While in Europe for nearly a decade, he covered bank loans and the high yield market, in addition to commercial paper, student loan, auto and credit card space(s).see full bio
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Jacob Gaffney is formerly Editor-in-Chief of HousingWire and HousingWire.com. He previously covered securitization for Reuters and Source Media in London before returning to the United States in 2009. While in Europe for nearly a decade, he covered bank loans and the high yield market, in addition to commercial paper, student loan, auto and credit card space(s).see full bio