Fears continue to hover over big banks, but top strategist Kenneth Fisher says that an end to the Federal Reserve’s quantitative easing policies will actually mean a boost for bank performance.
“Banking’s core business is simple: Take in short-term deposits, make long-term loans,” Fisher says in his latest Forbes column, adding that he thinks QE has been a hindrance, not a help, to the economy. “The spread between short- and long-term interest rates pretty well reflects future gross operating profit margins on new loans (effectively cost versus revenue). The bigger the spread, the more profitable future loans will be, all else being equal. Ending so-called QE steepens that spread by definition, since it stops the Federal Reserve’s buying of long-term debt (thus lowering future long-term debt prices and pushing rates higher). As the spread rises, so will bank profitability on new loans, and banks’ eagerness to lend — along with overall loan revenue — will rise in lockstep.”
Fisher also says that long-term rates are highly correlated between developed and developing markets. That means that countries that currently have the lowest spreads should get the biggest boost from rate increases, which has Fisher favoring markets like Chile, where spreads are extremely low. Overall he’s high on a number of banks that he discusses in the article, including Swedbank.