Lackluster reaction to banking results due to the resurgence of the crisis

The earnings delivered by financial institutions in the first quarter are not being well received by the markets. The reason is the ongoing banking crisis in the United States, this time rattled by the news that First Republic bank customers have withdrawn 58% of deposits, equivalent to 102 billion dollars.

This caused the bank’s stock to tank almost 50% during Tuesday's trading session, after announcing at the closing bell on Monday that profits had fallen 33% to 269 million dollars. The market’s response is not aimed exclusively at First Republic: others in the financial sector have been similarly chastised, though not as harshly.

Alberto Matellán, chief economist at MAPFRE Inversión, explained that this negative reaction is due more to the context than to the earnings numbers themselves. "They’re not tremendously buoyant, but the context isn’t particularly favorable," he said.

However, the storm seems to be more focused on mid-sized U.S. banks, and Matellán argued that there are a number of mechanisms that have proven effective on an ad hoc basis in the past that can prevent the problem from escalating.

Furthermore, the market seems to be taking a more optimistic view to the results coming out of tech companies, although Matellán insisted that "we have to take them with a grain of salt. The fact is that these companies have two characteristics that can affect them in the current context: sensitivity to interest rate rises and a lot of weight in the indexes.”

In general, the results are better than analysts' expectations, although Ismael García Puente, manager and fund selector at MAPFRE Gestión Patrimonial, recalled that they had lowered their estimates significantly, so it’s easier to now beat them. García Puente added that the accounts haven’t yet begun to reflect the rate increases of last year, either in margins or in costs, thanks to consumer resistance.

 

Solid, solvent and stable companies

Matellán pointed out that "solid, solvent and stable" companies can be very attractive in this context, in addition to the dividend payout. An example of such a company is France's LVMH, which this week became the first European company to exceed half a billion dollars in market cap.

García Puente explained that many funds look for companies with stable margins and the capacity to generate above-average profits, as is the case here. In addition, the luxury sector has benefitted from the reopening of China after the pandemic.

 

ECB meeting

García Puente doesn’t believe there will be any surprises and estimates that the European Central Bank (ECB) will raise interest rates by 25 basis points, aware that underlying inflation is still at maximum levels. For his part, Matellán stressed that the important thing will be Christine Lagarde's messaging.