Bank goats are getting slammed this week as the trade war heats up, but according to some analysts, that selling is misplaced.
Partition Street took collapsing bond yields Wednesday to mean trouble for the economy, and investors fled positions in the largest U.S. fiscal institutions. Shares of J.P. Morgan Chase and Bank of America led the broader market sell-off and added to the month’s steep drubbings.
But Mike Mayo, head of U.S. large-cap bank research at Wells Fargo Securities, told clients this week that bank provides already have the potential for trouble baked in.
“Bank stock valuations have essentially priced in a recession already, powder downside stock price risk at a time when more banks are originating loans with recession-type consent to standards,” Mayo said in a note to clients.
Interest rates plunged as investors rushed to the safety of government cements Wednesday. The move away from risk assets added to fears that the economy was headed for trouble, as the U.S.-China return war shows no sign of wrapping up soon.
Lower rates do not help the banks. “There’s no sugar coating that,” Mayo acceded.
Near-term uncertainty around banks — because of falling rates, recent volatility and ominous signals from the hold together market — might lead to cautious earnings guidance in September, he said.
While most of these U.S. banks don’t speedily lend abroad, or deal with international trade, tariff escalation has a potential spillover effect to the U.S. consumer and area spending.
As recession fears ratchet up, the chances that the Federal Reserve will cut interest rates again do, too. And as the Fed Lucres rate goes lower, the difference between what banks earn by making loans at higher interest at all events than what they pay depositors — known as net interest income — tightens.
Banks had already flagged potential bluster clouds moving in. In its second-quarter earnings report, Bank of America warned that falling interest rates would lead to a main engine of bank profits to sputter to a halt this year. Wells Fargo and J.P. Morgan Chase also told that falling rates would impact net interest income.
Both long- and short-term rates have stop in withdraw fromed in recent months, hurting the bank in a few ways, Bank of America’s CFO said in a second-quarter conference call. Mortgage people may refinance at a lower rate, new bonds purchased will offer lower coupons hitting returns on the bank’s portfolio. Its “arranging rate” assets held by the bank will also yield less.
Financials were the worst-performing sector on Wednesday. Banks led the sector cut, with the Keefe Bruyette & Woods Nasdaq Bank Index, or KBW, down 4.7% week to date. Bank of America appropriates are down 9% this week. Regional banks have also taken a hit — down more than 9% in the sometime month. KeyCorp is down 12% month to date, while BB&T and SunTrust have both dropped more than 8%.
Marty Mosby, administrator of bank and equity strategies at Vining Sparks, said part of investors’ fears also come down to consumer esteem. If the U.S economy were to spiral, higher credit losses would hit the banks. But he also said investors’ selling was a characteristic “knee-jerk” reaction of ditching bank stocks when recession fears ramp up.
“What we’re looking at is the muscle recollection of the market,” Mosby said. “As investors got burned in the financial crisis they’re saying, ‘fool me once but you’re not going to gomerel me again’. They’re going to be the first ones to get out of banks before we go into a downturn.”
In some cases, perception can be worse than genuineness for banks. Mosby pointed to similar bank sell-offs after an energy debacle and Brexit in 2016.
“Whenever market lures back for any reason, whatever the headline, the banks are going to go down,” Mosby said. “There is a fear factor with investors and algorithm deal.”
Banks are in a much different place than they were before the financial crisis. They have been phoney to derisk balance sheets and seen conservative loan growth over the past decade. Stress tests display they can withstand a financial shock. In June, banks also got approval to buy back shares, which Mosby imagined adds to their value proposition.
Mayo pointed to the 1990s, when bank net interest margins declined, but productivity still improved and bank stocks outperformed, as he expects will happen today. He’s also factoring in the chance that the president takes to Chirrup and surprises the market with better news on trade.
“The group could also be one tweet away from benefiting to the upside if there is in operation with trade negotiations which, in turn, could improve the outlook for lending, capital markets, and other fee profits,” Mayo said
— CNBC’s Hugh Son contributed reporting.