Despite strong balance sheets and stress tests, US banks have weakened this year as inflation and recession prospects weigh on Wall Street’s mightiest.
Investors have shone a big red light on the six largest publicly traded US banks, which have underperformed the broader market and wiped a whopping $257 billion from their market capitalization. combined $1.44 billion at the beginning of the year. (See the table).
The massive evaporation of wealth has encompassed the Dow Jones Industrial Average DJIA,
components goldman sachs group inc. gs,
(down 18.1% so far this year) and JPMorgan Chase & Co. JPM,
(22.3% decrease). Other members of the crisis stock megaclub include Wells Fargo & Co. (down 7.1%), Bank of America (down 18.1%), Citigroup C,
(down 16.8%) and Morgan Stanley MS,
Excluding Wells Fargo, the group’s performance is worse than the Dow 30’s 8.4% year-to-date loss and the S&P 500 SPX’s 12.2% loss,
In the broader banking and financial sector, Financial Select Sector SPDR ETF XLF,
is down 9.6% and the KBW Nasdaq Bank Index BKX,
it’s off about 15%.
With the Ukraine war headwinds, inflation on the rise, market volatility, and the Fed poised to raise interest rates, capital markets have come to a standstill, at least in terms of initial public offerings and other talks.
With its investment banking activities down and its capital ratios hit by price declines in the Treasury market, bank profits dipped in the first quarter on the back of a bumper deal crop and recovery in the first quarter of 2021 .
Watch: Goldman Sachs, Morgan Stanley, Citigroup report lower earnings
Ellen Hazen, chief market strategist and portfolio manager at FL Putnam Investment Management Co., said the bank’s lower capital ratios have weighed on stocks because they raise fears that credit quality will deteriorate in a recession.
“The conventional wisdom was that bank stocks would benefit from a steeper yield curve,” Hazen said. “Although the curve has become steeper, it has not helped bank stocks. That’s because of concerns about an economic slowdown. This reflects concerns that the Fed will go overboard and, in its desire to definitively squash inflation, drive the economy into a recession.”
The current environment marks a sharp turn from 2021, when bank stocks rose on expectations that higher interest rates would boost net interest income.
However, as 2022 progressed, inflation worsened with the Ukraine war and other factors.
The interest rate hikes planned by the Fed continue to generate nervousness around a drop in economic activity that affects banks.
This concern has outweighed any expected increase in net interest income that may arise as interest rates rise.
Also read: ‘Fed put’ is gone for now, says top Wall Street strategist
Also, as banks channel more capital to keep their capital ratios in line with regulatory requirements, they may cut share buybacks that have been supporting earnings-per-share growth.
Investors have seized on the tradition of a recession 12 to 18 months after the yield curve between three-year and 10-year Treasuries inverted earlier this year.
Deutsche Bank analyst Matt O’Connor said in a research note on Wednesday that bank stocks appear to be pricing in about a 50% chance of a recession. As of yesterday’s trading, bank stocks are down 21%, compared to an average drop of 30% during 27 bear markets since 1966.
In the severe COVID-19 stock sell-off of March 2020, bank stocks fell 51%, by comparison.
O’Connor said Deutsche Bank remains bullish on bank stocks and raised its 2022 earnings-per-share estimates by 6% on average.
“Markets are increasingly concerned about a recession or a material slowdown.
coming to the US economy… however, loan growth is accelerating and there is no
a sign that banks are tightening underwriting standards,” he said.
Among the megabanks, Wells Fargo WFC,
and Bank of America BAC,
They are still your best options. He noted that Bank of America noted that it expects second-quarter net interest income to increase by $650 million over the first quarter, with sequential growth expected in the second half of the year.
Wells Fargo expects its fiscal 2022 net interest income to rise in the mid-teens from the 2021 level due to higher-than-expected loan growth and rate increases. Wells Fargo also forecasts mid-single-digit loan growth in the fourth quarter.
FL Putnam’s Hazen remains bullish on Bank of America on expectations of higher net interest income, benign credit metrics and margin growth in its net interest income. The bank also has extensive exposure to the US consumer, which has increased collective deposit balances by 40% since before COVID-19.
“Consumers are in a very strong space,” Hazen said.
— Philip van Doorn contributed to this report
Also read: The economy contracts 1.4% in the first quarter, GDP shows, but mainly due to the record US trade deficit.