The banking industry, including retail and investment banks, is subject to seasonal trends. Seasonality is most commonly associated with agricultural commodities and certain retail industries. The existence of significant seasonal variation in the demand for capital, the commodity banks trade in, may seem surprising in a diverse, global economy with widespread, well-established capital markets.
While it's reasonable to assume that there are significant seasonal fluctuations in the funding and borrowing needs for specific industries, it would seem that the aggregate demand for capital across the entire range of individuals and industries would be relatively stable throughout the course of a year. However, there are easily identifiable seasonal trends for the banking industry, as measured primarily by the monthly volume of new loans.
Seasonal Patterns in the Banking Industry
The basic seasonal pattern of the banking industry is a period of annual lows in late January and February, followed by a surge in loans that begins in March and rises sharply through May, usually peaking in early June. From there, demand for banking services typically remains relatively flat to slightly down through the summer months. This period extends to around the first of October. Then, from the first part of October through the first part of January, the financial services sector as a whole tends to experience a steady increase in business.
In addition to loan activity and demand for investment services, the seasonal pattern in the banking industry can be confirmed by examining the performance of banking and financial sector stocks over the 20-year period from 1995 to 2015. The highest average returns on investment for bank stocks occur in the months of March and April, and secondarily in the months of October through December, while the worst-performing month on average for bank stocks is February.
Factors Driving Seasonality in the Banking Industry
One factor driving this seasonal pattern for the banking industry is a corresponding seasonality in interest rates. Although this has not been the case in recent years, with the Federal Reserve keeping interest rates artificially low since the financial crisis of 2008, there has historically been a seasonal pattern for interest rates. Rates tend to be lower in spring and fall, and higher in winter and summer, and corporations obviously try to obtain major financing when rates are lowest. Spring is historically the prime home buying season. This leads to a sharp increase in applications for home mortgages during March, April and May.
A third factor that drives the seasonal pattern for the banking industry is the increased demand for investment services that occurs in December and the first part of January. This is the time of year when portfolio and fund managers do a lot of rebalancing and when individuals make significant investment adjustments, such as end-of-the-year or first-of-the-year moves designed to gain tax advantages.
Tax planning is also a factor in the demand for bank services and can be a factor contributing to the seasonal rise in activity that begins in March, just prior to the April 15th income tax deadline.