How banking, financials are positioned for 2021

Yahoo Finance’s Julie Hyman, Myles Udland, and Brian Sozzi discuss the financial sector with Cheryl Pate, Portfolio Manager Angel Oak Capital Advisors.

Video Transcript

JULIE HYMAN: Well, if those rates are going to 2% by year end, what does that mean for financial companies and financial earnings? We are seeing treasury yields move up a little bit today, 1.1% is around where the 10-year is. And we've got the XLF, the financial spider ETF that is rising as well today.

Let's bring in Cheryl Pate, she's a portfolio manager at Angel Oak Capital Advisors who looks at financial stocks. Good to see you Cheryl. Thanks for being with us. So how are you thinking about rates this year and what that's going to mean for the companies you cover?

CHERYL PATE: Yeah, good morning. We are expecting that the yield curve will steepen as we continue to get more stimulus, vaccine deployment, more PPP funds out there. A steepening of the curve will be great for banks. It'll be helpful to their net interest margins which have been under pressure in the low rate environment. And so that we think starts to help around the back half of the year, should drive some better loan growth and some margin benefit.

BRIAN SOZZI: Cheryl, do you think the major banks are nearing a real boom in the first quarter in terms of trading activity? Just based on everything we've seen so far in terms of volumes.

CHERYL PATE: I think heightened volatility is certainly helpful to capital market segments of the big banks, particularly when we look at the trading revenues on the equity side. So that should continue through. That was a nice trend we saw in fourth quarter, and I think that continues through on the first quarter to date so far.

MYLES UDLAND: Cheryl, what about the regulatory side? We saw a mid-level tie up finally come through, just within the last couple of years. I haven't seen a ton of M&A activity on the really big money center banks side. What's your outlook there and how does that factor in? And I guess if the sector does better overall, how does that factor in maybe to management appetite for doing some kind of deal?

CHERYL PATE: We are looking for a pretty steep acceleration in M&A activity. We clearly saw a significant slowdown in 2020, volumes were down about 60% from 2019, where we were running at a consolidation rate coming close to 6%. I still think the factors are in place for a pretty steep acceleration in M&A activity. Not so much at the money center level, but at the regional and community bank level, where we're starting to see a lot of these super regionals enter into more merger of equal type transactions.

As there's still a lot of focus on improving efficiency in what is still a low rate environment, and we're still not sure on the ultimate path of credit costs in the medium term here. So there's certainly incentive and cost saves for that trend to pick up in 2020.

JULIE HYMAN: Cheryl talk to me about valuations with the financials, because this is a group that has been seen as potentially benefiting from a rotation into value which has not entirely materialized as of yet. And so the stocks haven't really appreciated at the same pace as the rest of the market. When do you think we start to see a catch up and presumably you think the valuations are pretty attractive here given your outlook?

CHERYL PATE: That's right. I think we're looking at a group that's still trading at a depressed level on a forward earnings and also a tangible book basis. As we start to get some comfort on the deployment of next round of stimulus, the vaccine, et cetera, I think you're going to start to see earnings estimates move up as we get a better handle on where credit's going, where reserve releases continue to come from.

We saw a lot on the commercial side on the fourth quarter earnings. We're going to start to see some consumer reserve releases, and ultimately loan growth and A&M expansion will help move earnings estimates up. Plus the valuation gap should catch up as well.

I think we saw a nice rebound towards the end of last year, and certainly it's been a bit of a pullback since earnings season. As we continue to get these data points and inflection points coming out, I think you will start to see that re-rating of the bank sector.

JULIE HYMAN: All right, well we'll check back in with you soon and see if that starts to happen. And if your outlook changes at all, Cheryl Pate is a portfolio manager at Angel Oak Capital Advisors. Thanks so much Cheryl, appreciate it.

CHERYL PATE: Thank you.