As concerns over an impending recession and declining profit margins dampen the attraction of the sector, US Bank Stocks are falling in December.
Compared to a 5.5% decline for the broader index during the same time period, the S&P 500 banks index has fallen about 11% this month.
Shares of Bank of America were among the worst impacted, falling 16% this month. Wells Fargo & Co. shares have fallen by about 14%, and JPMorgan Chase & Co. shares have fallen by more than 6%.
Asset prices have begun to show signs of economic gloom in recent weeks as investors grow more concerned that the Federal Reserve’s most aggressive monetary policy tightening in 40 years, intended to reduce inflation, would also stifle growth.
Recent declines in Treasury yields, which move opposite of prices, to three-month lows suggest that investors may be moving into Treasuries due to concerns about the economy.
Others have said that the roughly 12% decline in energy equities from recent highs is evidence that investors may be pricing in an economic slowdown.
A dangerous double whammy awaits banks: While a recession can hinder loan growth and increase credit losses, higher rates pose the risk of reducing profit margins if the interest that lenders pay on deposits consumes the interest generated by loans.
Treasury rates, which move counter to prices, have recently dropped to three-month lows, which may indicate that investors are turning to Treasuries in response to economic worries.
Others claim that the nearly 12% drop in energy stocks from their most recent highs is proof that investors may have priced in an economic downturn.
Banks face a risky double whammy: Despite the fact that a recession can limit loan growth and raise credit losses, higher rates run the danger of lowering profit margins if the interest that lenders pay on deposits outweighs the interest from loans.
The challenges banks anticipate facing have been further hinted at by job cuts: In order to manage a challenging economic environment, Goldman Sachs plans to lay off thousands of workers, a source familiar with the situation told Reuters on Friday.
This makes Goldman Sachs the second major global bank to decrease its headcount in recent months.
Matt Maley, the chief market strategist at Miller Tabak, noted that bank equities perform poorly during recessions and that more and more investors are concerned about a rough landing.
The S&P 500 bank index is now down more than 24% in 2022, despite bank stock prices generally trading in tandem with the S& P 500 throughout the year. Currently down 19% year to date, the S&P 500 is on track to have its largest annual percentage decline since 2008.
According to Walter Todd, a chief investment officer of Greenwood Capital, “the recent performance of banks is an indication that there is greater anxiety regarding the economic prognosis for 2023.” Todd’s company sold part of its bank stock earlier this year in anticipation of a slowdown.
One possible area of concern for investors is profit margins. In the third quarter, among the 20 banks tracked by RBC Capital Markets, higher rates caused net interest margins to increase to their widest average spread in three years.
Net interest margins measure how much a bank earns on loans and fixed-income securities compared to what it pays out on deposits.
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According to Gerard Cassidy, an analyst with RBC Capital Markets, a portion of the recent decline in bank stock prices can be attributed to expectations that net interest margins will peak next year and worries that “we are going to see increases in the provision for credit losses due to the expectation of a slowing economy in 2023.”
When banks release their fourth-quarter financial results next month, it will be more obvious how much pressure there is. Another potential roadblock for the group is that some of the banks that gave Elon Musk $13 billion to buy Twitter are getting ready to write off the loans this quarter, according to a story from Reuters this week.
Next week, when data on housing and consumer confidence are coming, investors will learn more about the state of the economy.
Naturally, investors who think the economy will remain stable may find the discounted shares offered by banks to be appealing.
According to Refinitiv Datastream, the S&P 500 banks index trades at about nine times projected earnings forecasts, which is significantly less than the entire S&P 500’s P/E ratio of over 17 times and below the long-term average P/E of 12 times.
Moderate damage to U.S. GDP is inevitable, according to King Lip, chief strategist at Baker Avenue Wealth Management, who claimed that his company just purchased bank stocks.
Our opinion is that a serious recession in the economy shouldn’t occur in 2023, Lip added. This ought to enhance investor confidence in banks.