Will the banks protect us from inflation? [Market comment]

Growing interest rates and bond yields increase bank income. According to NBP Polish banks will earn more this year than before the pandemic. The same may be the case in the US, with bank valuations still lower than in other sectors. Investing in this sector can be a good protection against inflation.

Banks as an investment "certainty"?

Banks have very good years ahead of them. This is due to the rising interest rates on the horizon. It will be preceded by a reduction in the level of redemption of bonds (quantitative easing) by FEDwhat could happen later this year. The closer to such a scenario, the more profitability should increase 10-year US government bond. And that will fuel bank profits.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.

Banks belong to cyclical industries, i.e. those whose results are positively correlated with economic growth. In short, the more the economy grows, the more they benefit. Since the beginning of the year, US bank stock prices have increased by 25%, while the overall market has increased by 14%. After years of dominance by the technology industry, supported by low economic growth and bond yields, as well as restrictive regulations after the 2008 financial crisis, banks are back in the game. The more that the industry remains undervalued, the P / E ratio for the sector is about 35 percent. lower than the average for the entire US market.

Good results of the banks will be supported mainly by the rising interest rates on 10-year US government bondsand in Poland by increasing market interest rates (WIBOR, EURIBOR). In such an environment, banks earn the most thanks to the growing interest margin. During the period of low interest rates, banks raised many fees to compensate for the lowered income, a reduction on them should not be expected. Growing lending is also driving the industry's growth. We observe an increased interest in loans in the USA and Poland. In Poland, we are dealing with a boom in housing loans, and when further pandemic fears disappear, the same may happen again in consumer loans. It is worth noting that the industry emerges from the period of low interest rates restructured and with a controlled level of costs, which makes its growth healthy.

In Poland NBP forecasts that banks' profits in 2021 will total PLN 13,4 billion, PLN 0,5 billion more than in 2019. And only six months ago, the same forecast indicated the first year in 30 years with a cumulative loss. Investments in Polish banks are still subject to the risk of an unresolved problem with the Swiss franc housing loan portfolio. The Supreme Court in Warsaw adjourned an important ruling in this case without setting a date.

Diversification advisable

Investing in banks is a good strategy in times of rising bond yields and interest rates, which can save us from rising inflation. When creating an investment portfolio, it is worth remembering both sectoral and geographic diversification. Especially that economic growth, which makes banks an attractive object of investment, is observed in most markets. We can achieve exposure to banks in the US through ETFs, e.g. SPDR S&P Bank ETF (largest banks) or SPDR S&P Regional Banking ETF (regional banks). We can also approach the topic more broadly by investing in financial ETFs, including, for example, a company Berkshire Hathaway belonging to Warren Buffett or in companies dealing with asset management, e.g. Blackrock. If we are looking for global diversification, it may interest us eToro TheBigBanks thematic wallet, which consists of the 25 largest banks in the world, including JP Morgan, ICBC and Societe Generale.