By Sinéad Carew
(Reuters) - Bank shares soared on Wednesday as investors bet rising inflation would push up interest rates and boost bank profits, and analysts forecast yet more gains from strong economic growth and a volatility-fueled boost in trading revenue.
The S&P 500 bank subsector was last up 2.5 percent at its highest level since Feb. 5.
In last week's broad market pullback, it fell as much as 11.3 percent from a more than 10-year intraday high hit on Jan. 29. The S&P 500 fell as much as 11.8 percent below its Jan. 26 record.
Investors had fled the broad market on worries that inflation would cause the Federal Reserve to accelerate interest rate hikes. Banks were dragged along even as strategists said they remained bullish on the sector, citing a boost to profits from rising rates and solid economic growth.
"There was a disconnect," said KBW analyst Brian Kleinhanzl. "Banks should actually benefit from the factors causing the market selloff."
And banks likely benefited financially from the selloff itself, with a volume spike expected to boost trading revenue which has languished in recent years due to low volatility.
"We think the shares can continue to outperform with continuing economic growth, rising interest rates and more recently a pick up in (trading) volatility," said Jason Goldberg, analyst at Barclays (LON:BARC) in New York.
To be sure, if long-muted inflation were to suddenly surge and cause the Fed to react aggressively, that would hurt banks along with the rest of the economy, said Kleinhanzl. But investors are not expecting that scenario any time soon.
"One thing you don't want is for inflation to become violent. I don't think we're there at all," said Michael Mattioli, portfolio manager at Manulife Asset Management who is bullish on banks.
"The fundamentals are set to accelerate from here. I'm expecting interest margin expansion. Loan growth seems poised to accelerate given tax reform," said Mattioli. "Companies have more cash. They may be paying down more debt but also reinvesting more into their business. Confidence is high in the economy."
Financials were one of the biggest boosts for the S&P 500 with a 2.3 percent rise, helping lead a broad rally despite data showing U.S. consumer prices rose more than expected in January.
JPMorgan Chase & Co (NYSE:JPM) was the biggest boost for the sector with a 2.3 percent gain. Bank of America Corp (NYSE:BAC) and Wells Fargo (NYSE:WFC) & Co added around 2.6 percent while Citigroup Inc (NYSE:C) rose 2 percent.