April 13, 2017 / 6:17 PM / 2 years ago

Bank stocks' rally threatened by slower loan growth

NEW YORK (Reuters) - Strong first-quarter earnings may not be enough to sustain a rally in bank shares that has been a primary driver of overall stock market gains since the U.S. presidential election, as slower loan growth dents investor enthusiasm for the sector.

Earnings on Thursday for major banks JP Morgan (JPM.N), Citigroup (C.N) and Wells Fargo beat expectations (WFC.N), but each showed evidence of slower loan growth.

Financials .SPSY have been the best-performing of the 11 major S&P sectors since the election. They are up nearly 16 percent on expectations of pro-growth policies and industry deregulation promised by President Donald Trump, as well as measured interest rate increases from the Federal Reserve.

However, shares of Wells Fargo, which runs a more traditional lending business, were down 2.6 percent on Thursday, making it the worst performer in the sector and putting it on track for its worst week since September.

Recent data from the Fed shows outstanding loans across the U.S. banking industry declined in February for the first time in more than three years and fell slightly for the first quarter.

While that pressured Wells Fargo, Citi and JP Morgan shares were little changed, as their earnings benefited from large gains in trading revenue.

“The U.S. bank rally, which to my mind was well-deserved, that rally has run its course,” said Peter Cecchini, chief market strategist at Cantor Fitzgerald in New York.

“Whereas we were bullish on banks late last year, we think that trade has largely played.”

Trump’s comments on Wednesday to the Wall Street Journal that he would like to see interest rates stay low also weighed on banks.

Low interest rates dampen a bank’s ability to make money from lending.

“(Trump) looks at a tightening as a potential threat to the type of robust, resurgent recovery that he was hoping for,” said Peter Kenny, senior market strategist at Global Markets Advisory Group in New York.

Financial stocks are still expected to show strong earnings growth for the quarter, with a 17.7 percent increase, according to Thomson Reuters data. Bank of America (BAC.N), Goldman Sachs (GS.N) and Morgan Stanley (MS.N) are to report results next week.

In addition, the sector is still cheap relative to the broader S&P 500. Financials currently hold a forward price-to-earnings ratio of 13.5, well below the 17.5 for the U.S. benchmark stock index .SPX.

“If I take a look at earnings projections for financials, I see double digits,” said Karyn Cavanaugh, senior market strategist at Voya Investment Management in New York.

“To me, they’re getting it done. So even with interest rates being so low, the bank stocks are still continuing to grow their earnings.”

Additional reporting by Sinead Carew, Saqib Ahmed and Lewis Krauskopf; Editing by Daniel Bases and Dan Grebler

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