Hedge Funds Might Be Losing Interest in Banks Despite High Prospects of Rate Hike

How are banking stocks usually reacting to an interest-rate hike? While one rule of thumb says most bank stocks tend to outperform following an interest rate increase, there are numerous examples of contradictory bank-sector reactions to previous interest-rate changes. There is no straightforward answer to the aforementioned question. However, the largest banks, which have substantial amounts of assets in federal-fund securities and other low-yielding investments, will most likely benefit from rising interest rates immediately. Only a few investors anticipated the Federal Reserve to make a move during this summer a little more than a month ago (which explains why most banks did not receive too much attention from the hedge fund industry during the first quarter), mainly due to investor worries over the broader market sell-off in equities and commodities in early 2016. But the odds that the Fed will pull the trigger during the summer have been increasing in the past several weeks, so the largest banks may be receiving more attention from the hedge fund industry and the investment community at the moment. The federal-funds futures market shows that the odds of a rate increase at the Fed’s July policy meeting are 58%, so one should definitely have a look at the pool of banks that will most likely benefit from higher rates. For that reason, the following article will examine how the hedge funds tracked by Insider Monkey were feeling about five large banks during the first quarter of 2016.

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At Insider Monkey, we track around 760 hedge funds and other institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

#5. Citizens Financial Group Inc. (NYSE:CFG)

– Investors with long positions as of March 31: 51

– Aggregate value of investors’ holdings as of March 31: $1.25 Billion

Citizens Financial Group Inc. (NYSE:CFG) fell out of favor with the hedge funds monitored by Insider Monkey during the first quarter of 2016, as the number of funds with stakes in the company dropped to 51 from 67 quarter-over-quarter. Similarly, the overall value of those stakes plummeted to $1.25 billion from nearly $2.17 billion. The 51 investors amassed 11% of CFG’s outstanding common stock. Citizens Financial Group, one of the oldest and largest financial institutions in the U.S., has seen its market value decline by 12% since the beginning of 2016. CFG’s credit metrics and asset quality remained relatively steady during the first quarter of the year. For instance, the company’s nonperforming loans were $1.1 billion at the end of March, down $57 million year-on-year. Meanwhile, CFG’s average loans and leases increased $6.3 billion or 7% year-over-year to $100.3 billion. Ken Griffin’s Citadel Advisors owns 5.67 million shares of Citizens Financial Group Inc. (NYSE:CFG) as of the end of March.

#4. Bank of New York Mellon Corp (NYSE:BK)

– Investors with long positions as of March 31: 52

– Aggregate value of investors’ holdings as of March 31: $5.06 Billion

The hedge fund sentiment towards Bank of New York Mellon Corp (NYSE:BK) climbed during the March quarter, with the number of funds from our system with stakes in the custodian bank increasing to 52 from 49. Nonetheless, the aggregate value of those funds’ equity holdings in BNY Mellon fell to $5.06 billion from $5.93 billion. Nearly 13% of the bank’s outstanding shares were hoarded up by the 52 hedge fund vehicles monitored by our team. Shares of BNY Mellon are up by 0.70% so far in 2016, partially propelled by a strong first quarter earnings report. The financial results for the quarter reflected the positive effect of the Federal Reserve’s first rate hike in almost a decade. The rate hike enabled BNY Mellon to re-impose management fees that have been previously waived on money market funds. Warren Buffett’s Berkshire Hathaway reported owning 20.83 million shares of Bank of New York Mellon Corp (NYSE:BK) in its most up-to-date 13F.

#3. Wells Fargo & Co (NYSE:WFC)

– Investors with long positions as of March 31: 90

– Aggregate value of investors’ holdings as of March 31: $29.76 Billion

Wells Fargo & Co (NYSE:WFC) also received some love from our smaller-sized hedge fund industry during the January-to-March period, after the number of asset managers with long positions in the bank rose by five quarter-over-quarter. Despite an increase in hedge fund interest, the overall value of those positions decreased to $29.76 billion from $32.56 billion. The 90 hedge funds invested in WFC stockpiled roughly 12% of the bank’s total number of outstanding shares. Wells Fargo, the third-largest bank in the U.S. based on assets, may have to increase reserves to cover bad loans issued to the energy industry, despite enjoying higher crude oil prices, according to company officials. Wells Fargo set aside $1.7 billion to cover possible losses on energy loans at the end of the first quarter, up by approximately $500 million quarter-on-quarter. WFC shares are 8% in the red year-to-date. Alex Snow’s Lansdowne Partners has nearly 20.48 million shares of Wells Fargo & Co (NYSE:WFC) in its equity portfolio as of the end of March.

#2. JPMorgan Chase & Co. (NYSE:JPM)

– Investors with long positions as of March 31: 97

– Aggregate value of investors’ holdings as of March 31: $6.93 Billion

JPMorgan Chase & Co. (NYSE:JPM) seems to have lost some of its appeal among the hedge funds followed by Insider Monkey, given that the number of money managers invested in JPM dropped to 97 from 100 during the March quarter. Correspondingly, the dollar value of those money managers’ equity investments in the bank fell to $6.93 billion from $7.58 billion quarter-over-quarter. The biggest American bank has seen its shares gain nearly 8% in the past three months, but the stock continues to trade in negative territory year-to-date. JPMorgan’s net income for the first quarter declined 7% year-over-year to $5.5 billion, which reflects a higher provision for credit losses and lower net revenue. Meanwhile, the bank’s net revenue for the quarter fell 3% year-on-year to $23.2 billion due to the impact of a challenging market environment during the three-month period. Ken Fisher’s Fisher Asset Management disclosed owning 14.00 million shares of JPMorgan Chase & Co. (NYSE:JPM) in its latest 13F.

#1. Bank of America Corp (NYSE:BAC)

– Investors with long positions as of March 31: 110

– Aggregate value of investors’ holdings as of March 31: $5.52 Billion

The smart money sentiment towards Bank of America Corp (NYSE:BAC) fell slightly during the first three months of 2016, as the number of asset managers from our system with equity investments in BAC declined to 110 from 113. In the meantime, the aggregate value of those investments decreased to $5.52 billion from the $6.80 billion recorded at the end of the December quarter. The 110 asset managers with stakes in BAC hoarded up 4% of the company’s outstanding shares. The shares of BAC, which are down 14% since the start of 2016, appear to be extremely cheap at the moment if bearing in mind that the bank is currently trading for 64% of its book value. Put differently, one could buy $1 worth of BAC’s assets for just $0.64. Bank of America posted revenue of $19.5 billion for the first quarter, which declined 6.7% year-over-year due to a massive decline in the bank’s trading businesses. Richard S. Pzena’s Pzena Investment Management has 30.28 million shares of Bank of America Corp (NYSE:BAC) among its pool of holdings as of March 31.

Disclosure: None