The direct embodiment of the Fed’s shrinking balance sheet on the bank’s balance sheet: the Fed will no longer invest when it holds treasury bonds, and the changes in the bank’s balance sheet can be divided into three situations. First, the Ministry of finance will not issue new bonds, while the bank’s balance sheet will remain unchanged. Second, the Ministry of Finance issued new bonds for banks to purchase. The scale of bank assets remained unchanged, but the reserve decreased and the national debt increased. Third, if non banking institutions purchase, the reserve on the asset side decreases and the deposit on the liability side decreases. During the period of 20172019, the deposit of the Ministry of Finance decreased by only $34.9 billion, while the bank reserve decreased by $0.74 trillion.
Review on the monetary tightening path of the Federal Reserve in 20132019: taper → increase interest rates for the first time → open the table contraction → continue to increase interest rates and shrink the table. Taper was launched in December 2013 and officially withdrew from QE in October 2014. The interest rate was raised for the first time in December 2015. By the end of 2018, the interest rate was raised nine times, and the interest rate was increased by 225bps. The reduction plan was announced in June 2017 and officially launched in October. By the end of August 2019, the total assets of the Federal Reserve fell to $3.76 trillion, a decrease of $0.70 trillion compared with the end of October 2017.
The impact of the Fed’s tightening policy on banks in 20132019: the speed of asset expansion fell and the proportion of loans increased. At this stage, the S & P 500 index has absolute returns, with both absolute and excess returns from February 2016 to February 2018. The US Federal Reserve’s reduction in the balance sheet reduced the bank’s excess reserve rate from 26% to about 10%, and the credit growth rate fell to 3.6% in 2019, down 2.8 percentage points from 2015. The proportion of bank credit in total assets increased from 52.6% at the end of 2014 to 55.7% at the end of 2019. The interest conference was officially launched on December 18, 2013. Taper stopped shrinking the table from August 2019. The S & P 500 bank index rose by 50.2%, while the S & P 500 index and Nasdaq index rose by 64.6% and 100.9% respectively in the same period. Among them, from February 2016 to February 2018, the S & P 500 banking index increased by 81.7%, while the S & P 500 index and Nasdaq index increased by 45.5% and 59.9% respectively in the same period. Bank investment opportunities appeared in the medium term of interest rate increase.
Performance of bank stocks in the four interest rate hike cycles since 1990s: the rise and fall of bank index vary greatly. What determines the bank market is the background of interest rate hike and the impact of interest rate hike on the economy. The S & P 500 bank index rose by – 2.4% / – 21.2% / 8.0% / 15.6% in the four interest rate hike cycles from 19941995, 19992000, 20042006 and 20152018, respectively. Over the same period, the S & P index rose by 0.1% / 6.8% / 11.6% / 20.8% and the NASDAQ index rose by – 2.4% / 38.4% / 6.2% / 30.5%. There are great differences in the increase of bank index in several interest rate increase cycles, mainly due to the different background of interest rate increase and its impact on the economy.
Risk tip: repeated epidemics and less than expected steady growth policies have led to lower than expected economic recovery.
Investment suggestion: maintain the industry over allocation rating and select individual stocks. The core logic of bank investment is economy. We believe that steady growth is the main tone of this year. The economy has stabilized and recovered, and the banking sector will usher in investment opportunities to maintain the industry’s “over allocation” rating. For individual stocks, one is to recommend Bank Of Chengdu Co.Ltd(601838) , which benefits from the steady growth policy. Second, pay attention to small and medium-sized banks with good regional economy, and pay attention to Bank Of Ningbo Co.Ltd(002142) , Jiangsu Suzhou Rural Commercial Bank Co.Ltd(603323) , Jiangsu Changshu Rural Commercial Bank Co.Ltd(601128) , Jiangsu Zhangjiagang Rural Commercial Bank Co.Ltd(002839) and Wuxi Rural Commercial Bank Co.Ltd(600908) .
