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Hanging on the interest
The Federal Reserve sent a ripple through the US banking sector when it announced in March that, because of the weaker economic outlook, interest rates would not be raised again this year. This immediately raised concerns in regard to the profitability of the financial institutions - after all, higher interest rates mean that banks make more on loans to clients. The net interest margin is a key indicator of return on loans. This figure has risen steadily since the Fed first raised interest rates in 2015. In the first quarter of 2015 the yield of all US banks was 2.95 percentage points. According to the calculations of the Federal Reserve Bank of St. Louis, that figure had risen to 3.35 percentage points by the last quarter of 2018. And JP Morgan has certainly been able to dispel these concerns somewhat: consumer banking loans rose four percent in the first quarter of 2019 as compared to the previous year. The market leader also demonstrated that that peak of the net interest margin has not been reached yet - although growth was slower than in the previous two quarters, the margin increased by 0.02 percentage points compared to the last quarter of 2018.
Since the initial fear of a recession took hold last August, US bank stocks have lagged behind the overall market. While the Dow Jones Industrial Index is currently three percent higher after a wild eight-month rollercoaster ride, the DJ Banks Index is still down almost one tenth. Bank securities have recently regained some ground though. Since the start of the year the sector has managed to remain three percentage points ahead of the overall market. Individual players such as JP Morgan or Bank of America are just about to take off towards new highs. If the boardrooms can be believed, the prospects for the sector are not at all gloomy. “Economic growth and consumer activities in the US remain solid,” states Brian Moynihan, CEO of Bank of America, upon presentation of the latest figures. And despite increasing scepticism on the part of the Fed, JP Morgan remains convinced that its outlook for the significant earnings driver interest surplus is realistic. An increase of about four percent over 2018’s figurer is anticipated for 2019. And even the net interest margin is expected to at least remain stable.
Attractive rates without price increases
Steady share prices of the US banks would definitely be sufficient for the two new multi-barrier reserve convertibles to achieve the maximum return. These products are designed to ensure attractive yields in sideways trending markets. Both soft-callable BRC’s have a maximum term of 15 months. The product issued by Bank of America, JP Morgan and Morgan Stanley offers an annual coupon rate of 8.00%. The model - designed in Swiss francs - allows the three banks setbacks up to almost 35 percent; the underlying barrier levels are defined as 65 percent of the starting price. The BRC offered by Citigroup, Goldman Sachs and Morgan Stanley permits just as much downward leeway. Issued in US dollars, it guarantees an annual interest rate of 11.00 percent. In both cases, the callable feature can shorten the term, and the issuer has the right to terminate the product as of the end of a quarter - the permissible first time being after the first two quarters.