Too much supply, so no demand begetting. That's what's been the story for the bank group ever since the Great Recession. It's one thing to have enough supply to make it so buyers can get full positions in, supply that can beget demand. It is another thing to have unlimited supply. That makes demand an impossibility.
For the last few weeks it's become clear that something's been changing about the banks. First, JPMorgan (JPM) said that it could see growth, actual growth, from net interest margin. Then we saw other banks starting to chatter about how construction lending might be coming back. BB&T (BBT) and First Horizon National (FHN) made that clear to me.
But what always lurked was the possibility of ANOTHER round of capital raises. They are dilutive. They are not controlled by the banks themselves. And they are performance killers. If you could somehow take off another round of deals you could get momentum to the group. Oh, and to be clear, because banks are so often viewed as fungible, if you get a big supply in some you end up selling your bank stocks to buy the beaten-down newly supplied bank. So there's a one-foot-out-the-door exposure to the whole community.
That ended with this round of stress test scoring from the Fed. If the upshot is some equity offerings here and there and some capital raises that are barely noticeable, then the supply issue is going to go away.
More importantly, the buybacks will finally start giving you a degree of tightness that has been entirely lacking for five years.
The one thing I don't expect is mergers because they've not been able to produce the results we thought they would. I mean, they are still trying to sort through the mergers at Bank of America/Countrywide/Merrill, with disastrous consequences. I have no idea how well the JPMorgan deals really were for them, as Washington Mutual was just horrid even as good as JPM is as an integrator. There's too much time consumed in fixing it.
Only US Bancorp (USB) and Wells Fargo (WFC) seemed to have done these acquisitions right and WFC didn't hit it out of the park initially with its Wachovia deal. If housing comes back in value, it sure will.
But now you no longer feel like you are about to get hit by a barrage of sector equity when you buy a bank. That's a huge change. I think it will propel the bank stocks higher still and will give you terrific opportunities without major pullbacks.